jonathan: from new york city to our audience worldwide, i'm jonathan ferro and bloomberg "real yield" starts right now. coming up, closing out 2019, treasury yields approaching 2%, looking to the fed to remain on hold through 2020, as the junkie st part of junk debt finishes the year on a high. investors looking for rates to stay low for a whole lot longer. >> it is hard to see the yield break out from here. >> trapped in this range. >> it should eventually be a good year for bonds.

>> still attractive, but not breaking out. >> 120 by the end of the year. >> if we get 120 by the end of the 10 year, we probably have to be looking at a global recession. >> we are going to test 1%. >> a lot of things would have to go incredibly wrong to get the 1%. >> you have to have a recession to get there. >> the u.s. economy could go to recession. >> unless the market begins to price an additional cuts, the 10 year at most will drop down to the 160 range. >> the fed will have to ease again. >> the fed is going nowhere. >> if there is any sort of weakness in the data, you will see an outsized rally in bonds. jonathan: joining me, kathy jones, george bory, and in -- from chicago, jim bianco. jim, let's begin with you, looking out to 2020, it seems the consensus view is for rates to remain where they are are or go lower. where you come down in that debate right now? jim: i think that's probably right. rates will probably drift lower. that's been the story the last 10 years. we've had no inflation, we are

in a record expansion, we cannot generate any inflation right now, rates are down 75 basis least basedear, at on the 10 year yield. the path of least resistance has been lower and i don't think that will change going into 2020. kathy: we are calling for higher rates this year, not a huge breakout to the upside, but two and a quarter stretch to 2.5% on -- 2.25% to 2.5% on the 10 year. unlike last year, we were starting at a higher level with the economy slowing down. now we have a lower level with the economy looking a little bit better, the global economy, in particular. we see room for the term premium to come up and expectations to pick up a little bit. george: i to say we are in a similar camp since we think that rates have room to move up from here, roughly 22 and a quarter is our target. you can summarize in a simple way.

we expect growth to be upwards of 2%. we think inflation will be around 2% and we think the 10 year yield will be on average around 2%. it's kind of a two by two by two forecast, if you will. jonathan: similar data points this year, as well, so what has taken us to 225 when we experience rates around 150 with the same economic backdrop next year that you are looking to repeat next year? george: like kathy said, i think the differences growth differentials, and although the economy decelerated a little this year, expectation will re-accelerate next year. that in another itself will allow yields to move higher. we think the fed will be anchored, we don't think it will do anything. the monetary stimulus you saw in the middle of this year starts to filter its way both through -- domestically and internationally and that helps boost growth incrementally. jim, we are arguing 25

or 50 basis points, but what are your thoughts on gdp picking up as the new year grows older? jim: i think there's the possibility it can pick up, but i would also remind you that the u.s. rates, with a two handle on the 30 year, we have the highest rates in the developed world for the first time in history. i think global rates, global growth matters for the bond market, and with all the other rates being lower and a lot of them being negative and they will probably stay there, it will be a tremendous downward pull on our interest rates. we cannot remain the outlier in interest rates. we have never been here with the -- before as the highest rate and i don't think it is going to stay that way much longer. either the rest of the world is going to have to come up a lot or we will have to be pulled lower and i think pulled lower we will see first. jonathan: let's talk about the shape of the yield curve. we are ending 2019 with some steepness, relative to where we have been, the inversion through andmiddle part of this year

the summer. 2/10. your take? george: we think there could be 10, as much as 15 basis points of steepening, but 5-10 is a good central call as the fed stays anchored. you get a modest uplift in yield. that's one of our highest conviction views, position for a steeper yield curve next year, and we think that kind of positioning will work best. kathy: i agree, looking for a steeper yield curve because the fed will stay on hold. i think if there was a surprise, it's that we get a lift in inflation and inflation expectations. it is starting to build a little bit and we are seeing the breakevens in the tips market come out. i think if there is a surprise, it might be a little more inflation or at least the expectation of it than we have seen before. jonathan: let's talk about what that means for the consensus call next year. the risk of morgan stanley, which i know is shared by many who watch this program, the risk

has skewed asymmetrically to cuts in 2020, but the reaction function of the fed has shifted. is that your take? kathy: i think they would need to see, as jay powell said, they would need to see a material change in the outlook to make a change good the interpretation is we would have to see a worse economy in order to start cutting again and we are not even considering raising rates. but if we are right, we see more upward pressure on inflation, that sort of expectation might shift in the second half of the year. jonathan: jim, do you share that view? that the fed is not going anywhere through 2020? do you have an understanding of the threshold that would bring the fed back to the table? jim: no, and i don't know if any of us really do. remember, they did a fed listens tour in 2019 and they will do it in the first half of next year, roll out a new policy directive.

it is expected to be an average inflation targeting policy, which means even if we get the uptick of inflation expectations, the fed will allow it to happen without even considering raising rates. i think that raising rates, unless something dramatic happens, is off the table. lowering rates, there are a lot of things could happen to make rates go lower. the uncertainty around more trade in the phase two talks, the elections, and just correction in the stock market. as much as they want to say it doesn't matter, it does. it does every time it happens. jonathan: how do you push that view through the rest of the yield curve? particularly in the environment you described, what does it mean for further out? jim: i think the front end will stay anchored. i think if long rates come down, the problem with the yield curve is it is a corollary to your rate call. i think the yield curve could be flatter. if there's going to be a surprise in the yield curve call, it's because the repo market does not seem to be fixed. i mean, we are going to get through year-end, but we will continue to have $60 billion per

month of buying treasury yields, and that could have downward pressure. they are trading on the lower end of the target the fed have. with all of the stimulus they are pumping in, they could break -- there could be a breakthrough and you could see a 140 or something on the three month bill without the fed moving, because of what is happening in the repo market. i try to doe thing on a program like this is work out where the consensus is, the growing fame and the growing consensus into the new year and where you should push against that. where is the pain trade for the 10 year yield through 2020, higher or lower? jim: i've always thought the pain trade in the bond market has been lower. i think most people are really scratching their head as to why we are in one handle given the news, and especially with the pain trade being in lower in europe. i continue to think that is the pain trade right now. if we were to go to the low ones, especially without signs

as you saw in the top, without signs of a recession. if we were to go back to where -- the lows we were in august of this year, and may be lower. jonathan: george? george: i think the pain trade from a capital at risk standpoint would be materially higher rates. the tremendous amount of money that has been put into the market across all of fixed income this year, massive inflows. a lot of that money is committed at very low yields. a 100 basis point jump in yields means significant capital losses or market to market losses across the market. jim has a good point, but i think the consensus view is a range, a relatively tight range. i would say it is basically what -- let's call it 150 to 225. go outside that range, vol will go through the roof. if we do go below the 150 level, it is duration extensions,

it is sort of people really, as jim said, you will see a meaningful scramble to get yourself invested and stay invested in a very low yield environment. jonathan: final word, kathy. kathy: i think the pain trade is lower, but for different reason. that's because spreads are very tight in the credit market. if are going below on 150, and means the economy is doing poorly and spreads are too tight in that environment. if we are going down there because were on the cusp of recession, the yield chasing and the sort of goldilocks scenario for credit will have to reverse itself. i think that's where the pain is. jonathan: you're saying you need a recession environment to experience some of this. sub 150. that's what we need? kathy: i think so. if we get that, it means credit spreads are too tight. jonathan: you guys are sticking with me. we will talk about credit. next up on this program. coming up, the auction block. wrapping up a big year for high yields.

that conversation is next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to begin in asia, dollar bond issuance fell $550 million this week. 2019 sales topped $126 billion. in the u.s., high-grade issuance slowed before the year end holidays with sales just surpassing $1.1 trillion for the year, a 4% decline from last year's total, and closing out the year with u.s. junk issuance pushing 2019 sales closer to

$270 billion, more than a a 60% increase from 2018. staying with high yield, morgan stanley weighing in on the big rally in ccc's. >> valuations are tight. valuations are tight. high-yield -- credit valuations are tight. high-yield valuations are low. ccc's have come back. there will be some supply. it will not be this easy forever. jonathan: back with me around the table is kathy jones, george bory, jim bianco. george, what a way to end the year, ccc's, massive rallies, 12 straight days of gains. why? george: across high-yield, you are pulling in 2020 returns into 2019. i think there is a year-end squeeze going on as people scramble. we just talked about yields in general, looking for that recovery trade. where can i get the incremental yield, where can i get the incremental return, how can i set myself up for next year? we have seen a meaningful squeeze into the market. ccc's, if you look at that universe, there are about 10 companies that are up anywhere from 10% to 20% in returns.

in just the last month. jonathan: that concentrated. george: just in the last month. that is the interesting thing about ccc's, it is very idiosyncratic. it is very company specific. it is not an asset class in and of itself, it is a basket of very specific companies that are doing very different things. it is definitely the high beta part of the credit market, so people will use that as a data trade, but right now, ccc's are basically a bet on two things, and that is basically energy, and to a certain extent, retail. there are a few other plays in there. but those are your two bets, and i think people have been creeping back into the energy trade as oil prices have come up, and looking for that to be the next big play for next year. jonathan: kathy jones, your thoughts on this? you have been conservative on the program with spreads going tighter. we are starting to pick up in ccc's. as you look at this, what are you thinking? kathy: i'm thinking this is the last push where people are

willing to buy just about anything in order to get a little bit of incremental return and they are disregarding the risk involved. not too surprising, it is the end of the year. not that much liquidity, a little bit of a rally in oil prices which has given us a boost. they are not afraid of duration. it is not surprising, but would you want to hold it for any length of time? we think not. jonathan: what do you think, jim bianco? jim: i've got to agree with george and kathy. ccc is in the early part of an economic cycle, is a bunch of beaten-down cyclicals. that's why you want to run into it when you come out of the recession as they rally. right now it is the land of misfit toys, broken companies that have problems if you are in ccc's in the 11th year of a recovery. a lot of it is energy, it's been rallying. energy's rallying, but let's step back from the last 12 days.

ccc's have been a terrible investment for the high-yield market all year. they have lagged everything else. they are highlighted by energy, which has lagged everything else as well. the only reason somebody would want to buy that stock is if there was a turnaround or workout player that thinks they could come in, sell off assets, fire management, and resell the company. if you are not in that game, at this stage, you don't want to be playing in that space. jonathan: i want to pick up on something you said. we are in the 11th year. why is that relevant? spreads are back to levels in 2014, 2018, and you could have taken that as a signal that we are late cycle. but here we are in 2020 looking for more expansion. why is it relevant that we are in year 11 and spreads are where they are? jim: from the ccc perspective, to stick with that, is that any kind of cyclical that has been sold off, was sold off early in the recovery, has recovered. anything that is left in that category right now, when you get late cycle, is a problem of credit. that is pretty much all the way up and down the line.

there is really hard to find value at the lower end of the credit. it is hard to find value in the investment grade at the end of the cycle as well, too, because it isn't just the general selloff you get coming out of recession. that is why i think people have to look at these. george is right, it is a collection of companies, not necessarily thematic. it is the manic -- thematic at the beginning of the cycle. jonathan: the risk is this continues, and then you look at the other places that did not participate this year, leveraged loans, elsewhere. your thoughts on that? george: if you look across credit in general, the leading edge of the selloff was certainly in the loan market. i think you can make the argument that there is some incremental value there, especially when you think about some structured products that package up loans, like a clo. there is some value there, but it is buyer beware. you have to be be careful of what you are buying, look carefully at the managers, the loans themselves.

we would take a somewhat cautious approach, but those prices were down pretty dramatically just a month or two ago, so there was some genuine value there. our central message for high-yield overall is take a more defensive stance. be realistic about what the asset class can deliver. anything greater than a 3% return, once you start to carve out the risky or less liquid parts of the market, would be impressive in our opinion, given where yields are starting. given where spreads are starting. but at 2%, 3%, maybe 3.5% full return on a relatively low risk profile portfolio is very achievable. jonathan: kathy, i know your take is that we have seen the price of appreciation. next year for high yield, a story of coupon. for you, george, investment grade, i was looking through your base case, spreads widening through 2020.

what is driving that? george: a couple of things. number one, we have had a tremendous technical backdrop. huge inflows into the asset class and that is across fixed income overall. we think that moderates. the other thing that was a big seachange this year is a lot of investment grade companies actually started to reduce debt. you don't typically see a company deleverage voluntarily. we had a few very big names, very large cap companies that purposely tried to delever or modestly restructure their balance sheet. the pace of that is likely to slow next year. the pressure on companies to continue to do it is likely to slow. slightly higher yields, a little bit less demand, or inflows into the asset class, combined with less of what i would call less than friendly credit activity. spreads modestly wider. that is our base case. i think there is a reasonable probability for that. jonathan: still ahead on this program, the final spread, the week ahead and a holiday-shortened trading week.

2020 conviction calls next on the program. this is bloomberg "real yield." ♪

jonathan: from new york city, for our audience worldwide, i'm jonathan ferro. this is bloomberg "real yield." it is time now for the final spread. coming up on monday, a slew of u.s. economic data, including durable goods orders and new home sales. tuesday, markets in the united states, closing early for christmas and remaining closed through christmas day. wall street reopening on thursday with initial jobless claims. friday, china reporting industrial profits. with some final thoughts, my guests still with us. the conviction trade going into 2020, the calls. jim bianco, beginning with you, what is your conviction call going into the new year? jim: lower yields. jonathan: very short and straightforward. lower yields.

george bory? george: steeper yield curve is our highest conviction view as it relates to rates. on the credit side, it is protect your capital. there is an inverse between that steepening curve, so move down the curve for spread. on that steepening bias. jonathan: to be clear, the steeper yield curve driven by the longer end? high-yield debt high rates on tens? george: primarily by 10's. 30's move slower. kathy: we agree, steeper yield curves driven by higher rates, wider credit spends, especially at the lower end of credit quality. jonathan: can we put a number on those wider credit spreads? what are you looking for? kathy: investment grade, modest spread widening. high yield, it doesn't take much to blow out 100 or 150 basis points if you get a hiccup in the market. it could happen. jonathan: your thoughts, finally, to get some pushback around here? there is a consensus about curve steepening. you don't share it, do you?

jim: no, i don't. like i said, the curve is somewhat related to your rate call. if i've got rates going down, the curve being somewhat anchored, unless something dramatic happens, you'll probably wind up with the flattening of the yield curve, too. i do think that the story has been -- the curve has been flattening since 2014. maybe it bottomed for good in september of this year, but it has been in a long downtrend. i suspect we will continue to see it move at least flatter. i don't think we will get back to september's inversion, but it will keep going lower. jonathan: let's get to the final round, the rapidfire around. three quick questions in three quick answers. the 10-year yield, 2.80, can we retest the high from 2019, in 2020, yes or no? george? george: retest the high of the yield? jonathan: 10 year at 2.80. george: no. kathy: no. jim: no.

jonathan: u.s. twos versus tens, steeper or flatter through year-end into 2020? a decent idea of where this is going. kathy: steeper. jim: flatter. george: steeper. jonathan: fomc, unchanged for the year, rate cut, rate hike? george: cut. kathy: unchanged. jim: unchanged. jonathan: great to catch up with you. thank you very much for joining us. thank you to you at home. from new york, that does it for us. i will see you in the new year. enjoy the holidays. this was bloomberg "real yield." this is bloomberg tv. ♪

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