jonathan: from new york city, i am jonathan ferro. bloomberg real yield starts right now. ♪ coming up, closing gaps 2019, treasury yields approaching 2%. at looking for the fed to remain firmly on hold through 2020. we finished the year on a high. we began with a big issue -- looking for rates to stay low for a whole lot longer. >> the yield is moving sideways. >> it should eventually be a good year for bonds. you get to 1.2% on the 10

year, we will be looking at a global recession. >> we are going to test 1%. bux a lot of things would have to go incredibly wrong to get to 1%. most will dropat down to that 160 range. >> the fed is not going to cut again. >> if there is any weakness, death jonathan: joining me -- jonathan: joining us from chicago, john bianca. at 2020, it looks like the consensus is rates well stay where they are or go lower. where do you go on that debate? torates will probably drift lower. that has been the story the last 10 years. we have had no inflation.

we are in a record expansion. cannot generate inflation right now. rates are down 75 basis points on the 10 year yield. the path of least resistance has been lower. i do not see that changing. >> we are calling for higher rates this year, not a huge breakout to the upside, but we are looking for two and a quarter stretch. unlike last year, we are starting at a higher level with the economy slowing down. now we are starting at a lower level with the economy looking better. we see room for the term premium to come up. inflation expectations to pick up a little bit. >> i would say we are in a similar camp. we think rates have room to move up from here. roughly two and quarter is our target. you can summarize it in a simple way -- we expect growth to be

upwards of 2%. we think inflation is going to be 2%. we think the 10 year yield on average will be 10% -- 2%. it is a two by two by two forecast. toathan: what has taken us 225 when we experience rates around 150 with the exact same economic backdrop this year to repeat next year? >> the differences growth differentials. even though the economy decelerated, the economy is going to pick up and re-accelerate next year. that in and of itself will allow yields to move higher. we think the fed is going to be anchored. we do not think the fed is going to do anything. the issues start to filter internationally and that helps boost growth incrementally. 25athan: we are arguing over basis points. what are your thoughts on gdp

starting to pick up in the new year? jim: there is possibility that it can pick up. i would remind you that the u.s. rates -- we have the highest rates in the developed world for the first time in history. global rates, global growth is what matters for the bond market and with all those other rates being negative and likely to stay there, that will be a tremendous downward pull on our interest rates. we cannot remain the outlier in terms of interest rates. we have never been here before and it will not stay that way for much longer. either the rest of the world will have to come up a lot or we will continue to be pulled lower. that is what we will see first. >> george, your thoughts on that? we are ending 2019 some steepness. have we been with the inversion at the middle part of the summer. what is your take?

manye: there could be as as 15 basis points of steepening. five to 10 is a good central call. it is one of our highest conviction views. the position fray steeper yield curve next year. that kind of positioning will work best for you. jonathan: kathy? kathy: i agree. i think if there is a surprise this year it is that we have a in inflation and expectations. we have seen us break even. if there is a bit of a surprise it will be a bit more inflation or the expectation of it. jonathan: let's probe what that means for the consensus going into next year. there is an overwhelming belief that comes from morgan stanley that risk goes asymmetrically to cuts over 2020.

it has shifted. is that your take too, kathy? athy: we would have to see material change in the outlook to see it change. the interpretation is we would have to see a much worse economy to start cutting again and we are not even considering raising rates. if we are right, we might see more upward pressure on inflation. that sort of expectation might shift in the second half of the year. jonathan: jim, do you share the view that the fed is not going anywhere in 2020? do 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 do. out ad is going to roll new policy directive next year. it is expected to be an average inflation targeting policy, which means that even if we get that uptick of the inflation expectations, the fed is going to allow it to happen without

considering raising rates. raising rates, unless something dramatic happens, is off the table. there are a lot of things that could happen that could make rates go lower -- uncertainty around more trade, the elections, and do not forget about the correction in the stock market. as much as they want to say that does not matter, it does. jonathan: how do you push that view through the rest of the yield curve? what does it mean for further out? jim: the front end is going to stay anchored. and therates come down yield curve is a corollary to a rate call. i believe that the rate curve could be flatter. if there's going to be a surprise and the yield curve call it is because the repo market does not seem to be fixed. we will get through year end, but we will continue to have $60 billion a month of buying of

treasury bills. that could continue to push downward pressure. the fund rate is trading on the lower end of the targets. with all of that stimulus their pump again, there is potential they could break through. you could see a 140 on the three months without the fed moving because of what is happening on the repo market. jonathan: i want to try and work out where the consensus is, where the growing consensus is going into a new year and where we should be pushing back against that. where is the pain trade? higher or lower? jim: i have always thought it has been lower. most people are really scratching their head as to why we are in a one handle given all of the news, especially with the pain trade being 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

of recession, if we were to go back toward where we were at the lows in august of this year and may even lower. jonathan: your thoughts, george? berge: the pain trade would materially higher rates. a tremendous amounts of money has been put in across -- a lot of that money has been committed at very low yields. a100 point jump is significant. jim has a good point, but the consensus view is a range. itis basically, let's call one hundred 50 -- 150 to 200. to capital a rush tax if we are breaking above 225 and trending higher. if we go below that 100 50

level, it is duration 150nsions, people -- that level it is duration extensions. jonathan: final word, kathy? kathy: the pain trade is lower, but for a different reason. if we are going low on 50, that means the economy is doing very poorly. tight in that environment. if we are going down there because we are on the cusp of recession, the yield chasing and this goldilocks scenario for credit will have to reverse itself. that is where the pain is. jonathan: we need a recessionary environment? that is what we need? kathy: i think so. if we get that, it means credit is way too tight. jonathan: we will talk about credit next up on this program. on the auction block, -- this is

bloomberg real yield. ♪

♪ jonathan: i am jonathan ferro. this is bloomberg real yield. i would like to head to the auction block and begin in asia. it is down to $556 million this week. despite the slow down, 2019 delivered a four year record. in the u.s., it slowed before the year and holidays with sales surpassing 1.1 trillion, a 4% decline from last year. closing out the door with -- close to 270 billion.

that is more than a 60% increase from 2018. weinstein railing -- weighing in. >> valuations are tight. low.valuations are it is not going to be this easy forever. jonathan: sitting around the table, jim bianco, kathy. what a way to end the year. yields, you're pulling in 2020 returns into 2019. there is a year and squeeze as people scramble. we just talked about yields in general, looking for that recovery trade, where can i get that incremental return, how can i set myself up for next year. we have seen a meaningful squeeze in the market. triple c's, if you look across that universe, it is about companies that are up anywhere from 10% to 20% in returns.

that is the interesting thing about triple c's. it is 80 of syncretic. -- it is idiosyncratic. it is a basket of very specific companies that are doing very different things. it is the high beta part of the credit market, so people will use that as a beta trade, but triple c's are a bet on two things -- energy and 28 certain extent retail. a -- to a-- two certain extent retail. they're looking for that to be the next big play for next year. jonathan: kathy, your thoughts on this? you have been cautious and conservative on this program. as you look at this in the moment, what are you thinking? kathy: i am 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. they are disregarding the risks involved. it is not surprising. it is the end of the year. not that much liquidity, we had a little bit of a rally in oil prices which give us a boost. it is not just surprising, but would you really want to hold it for any length of time here? jonathan: what you think, jim bianco? jim: i have to agree. the triple c's in the early part of an academic cycle is a bunch of beaten-down cyclicals. that is why you want to run into it as you coming out of a recession. in the late cycle like we are now, it is the land of misfit toys. it is a lot of broken companies in au're in a see 11 -- triple see 11 years into recovery.

triple c's have been a -- they are highlighted by energy which has lagged everything else too. the only reason someone might buy that self -- stuff is if they can come in into fire management. you are not in that game. at this stage i do not think you want to be playing in that space. jonathan: we are in the 11th year -- why is that relevant? in 2014, 2018, you could have taken it as a sign then that we are late cycle. isn down the ballot -- why it relevant that we are in year 11? jim: from the triple c perspective, to stick with that, any cyclical that has been sold off early in recovery has recovered. anything that is left in that category right now when you get late cycle is a problem credit.

that is pretty much all and down -- up into down the line. there is hard to find value at the lower end of credit. there is hard to find value in the triple b sector at the end of a cycle too because it is not just a general selloff that you would get coming out of a recession. george said it right -- it is a collection of companies. it is not necessarily thematic. jonathan: the risk i guess is that this continues and then you have to look at the other places that did not participate this year. what are your thoughts on that? george: if you look across credit in general, the leading edge of the selloff was in the loan market. you could make the argument that there is some incremental value there, especially when you think about some structured products that package up loans. there is some value there. insert a buyer but where -- you have to be careful about what you are buying and look carefully at 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. takeentral message for -- 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 more risky or less liquid parts of the market, would be impressive in our opinion. even where spreads are starting. 3%, a three and a half to 3% profile perfect for ilio folio --e per jonathan: for you, george, investment grade -- i was looking through your base cage. there are some widening and

there through 2020. what is driving that? inrge: number one, we have a -- a tremendous background. we think that moderates. the other thing that we think was a big seachange was a lot of investment grade companies started to reduce debt. you do not see a company deleverage voluntarily, but we had some large-cap companies that purposely try to deal ever --delever -- slightly higher yields, a little bit you less -- little bit less demand combined with credit friendly activity means that spreads wider. i think there is a reasonable probability for that. jonathan: head on this program, the week ahead. we will get there.

coming upction calls next. this is bloomberg real yield. ♪

♪ jonathan:jonathan: from new york worldwide, audience i am jonathan ferro. it is time now for the final spread. a slew of u.s. economic data, including new-home sales. tuesday markets in the united states are closing early christmas eve and remaining closed through christmas day. wall street will be opening on thursday. write a, chinese reporting industrial profit numbers as well. friday, chinese reporting industrial profit numbers as well. what is your conviction call going into the new year? >> it will be lower yields. andthan: very short

straightforward -- lower yields. >> a steeper yield curve is our highest feo as it relates to rate. there isedit side, -- an inverse between that steepening curve. jonathan: to be clear, this steeper yield curve -- >> by primarily tens. 30's moves a little bit slower. jonathan: kathy? kathy: steeper yield curve driven by higher rates. jonathan: can we put a number on that? what are you thinking? , i couldvestment grade say modest spread. high-yield it does not take a lot to move 50 basis points if you get a hick up the market. jonathan: jim, your thoughts finally just to get a little bit of debate and pushback. there is a consensus here about curve steepening.

you do not share it, do you? jim: i do not share it. the curve is somewhat related to your rate call. if i have rates going down into the curve being somewhat anchored, unless something dramatic happens, you're probably going to end up with some flattening of the yield curve. the story has been -- the curve has been flattening since 2014. it might be at bottom for good in september of this year. it has been in a long down tread. i expect we will continue to see it move it flatter. i do not think we will get all the way back to september's inversion, but it will not go lower. jonathan: three quick questions with three quick answers. can we retest the high of 2019 in 2020, yes or no? george? george: can we retest the high of the year? no. kathy: no.

jim: no. jonathan: steeper or flatter through year end into 2020 daca -- into 2020? kathy: steeper. jim: flatter. george: steeper. hikehan: cut rate -- rate or -- great to catch up with you. thank you all for joining us. from new york, that is it for us. enjoy the holidays. this was bloomberg real yield. this is bloomberg tv. ♪

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