becae beyond technology... there is human ingenuity. every day, comcast business is helping businesses go beyond the expected. to do the extraordinary. take your business beyond. >> from san francisco for our viewers worldwide, i'm taylor riggs. bloomberg "real yield" starts now. taylor: coming up, yields on the u.s. 10 years slipping back below 1.90 heading into the final week of the year as investors place their bets on rates in 2020. signs of optimism. it may not signal the all clear just yet. what it means for inflation and growth expectations in the new year. and wrapping of the year of

outperformance in credit. corporate dons on track for the best returns in a decade, but how long can the rally continue? begin with the big issue, markets betting low rates are here to stay in 2020. >> it is hard to see the yield breakout from here. >> bond yields moving sideways. >> we can't generate any inflation right now. attractive but certainly not breaking out. >> 1.20 by the end of the year. >> if we get attractive but certainly not breaking out. to 1.2% on the 10 year, we are looking at a global recession. >> we are going to test 1%. >> a lot of things have to be t% going incredibly wrong to get to 1%. >> unless the market begins to price in additional cuts, the 10 year, at most, will drop down to the 1.60 range. >> the fed will probably not cut again. >> if there is any weakness in

the data, you will see an outsized rally in bonds. least resistance has been lower, and i see no reason to see that change in 2020. taylor: can we break out of the 2019?set in joining us from new york are collin martin, peter tchir of and in securities, pasadena, john bellows. i want to get your 10-year forecast from each of you for 2020. we think it will rise modestly in 2020, somewhere in -- 2.25 range. we think short-term rates will stay anchored. the fed will stay on hold. with signs of stabilization across the global economy, as well as in the u.s., pickup in inflation expectations, we can get close to two point 25 for the 10 year treasury. taylor: peter? we will see 2.25

as soon as january and february. higher yields, deeper curves as the global growth curve gets priced in. more stimulus out of europe. the better growth optimism is an argument for higher yields, but i would highlight to other components. inflation continues to be very subdued. 2019 was supposed to be a year of higher inflation.

-- 2.25 range. not only did that not happen but inflation moved lower across a set of measures. the second component is the fed. i wanted to talk about the fed. the wirp function on the bloomberg shows no movement in direction in the first half of the year. i know it is far out, but what is your take on fed action, at least in the first half of 2020? collin: we think they will be on hold. we like to say for the foreseeable future. that is what the markets are pricing in, what fed officials are telling us. with the three cuts they did this year, they have theessfully un-inverted yield curve, and now financial conditions remain easy. barring a major change in the economic outlook, there may be a risk off environment where we see stocks fall, we think they will be on hold. taylor: peter, i want to get your take now that phase one of the trade deal has been sort of resolved.

what do you need to see in the economic data to get the fed to move in either direction? direction in the first

half of the year. in the expansion phase of the cycle. essentially, if i were to look at the curve today, i would say this is classic pre-recessionary behavior. taylor: your take on a steep yield curve, the steepest since 2018? i think the reese steepening of the yield curve,

the fed deserves credit. i think the reese steepening of the yield curve, the fed deserves credit. beginning of 2019, the yield curve was inverted, sending a clear signal that short rate work too high, monetary conditions to type, and the fed's cuts have address that. however, it is premature to signal an all clear here, declare success. if you think about the level of onlds, inflation breakevens the 10-year are 1.75, well below the 2% mandate, below where we were six months ago. a lot below where we were 18 months ago. the yield curve is not inverted, and that deserves credit. but we are a long ways from an all clear. the level of inflation breakevens is still worrisome and a man's attention from the fed. we are showing a chart of the fed's balance sheet, you were highlighting this, the togetherness of the fed's actions and the balance sheet, and how we see a steepening yield curve. is that different this time around? it is a good sign given rates are rising on the long end versus the last time we saw a

steepening of the yield curve. it is bets on the short end of the curve. peter: i want to take one step back. august is on begot the diversion. there were a lot of technical factors in play. a bunch of inflows into long dated treasuries, a shortage of sellers. some of that flattening was purely technical. we reversed that. we wrote back in august, steepening the yield curve should be the fed and treasury departments job. the fed has done a lot for that. what i'm before now is the treasury department to issue more duration. this department is focused on issuing a lot of t-bill and front and bonds. the value is skewed alluded to the front end. i would like to see them come out and issue more 10-year, 30, maybe introducing a 20-year. i think the steepening yield curves gives comfort.

it is really the yield curve that leads a discussion, rather than the discussion leading the yield curve. taylor: collin , do you agree, are you comforted by the steepening of this yield curve? this time is different with every steepening after the initial inversion. john, thisgree with is a success by the fed. i do think it's important to put this in perspective. it is still relatively flat if you look at the three-month, 10 year, you are still in the 25, 30 basis point range. when you look at the broad yield curve, still a relatively flat trend. if you look at the past mid cycle adjustments of the 1990's, that was also followed by a steepening of the yield curve. , but think it is a success we need to see, but we need to see more before we see an all clear sign. taylor: jon, as you look at

2020, is the pain trade higher or lower yield? john: if i could respond to something that collin said about the midcycle adjustments. it's important for investors to understand this is not the 1990's anymore, the fed is doing something different than what they've done in the past, not responding to something global. they are responding to low inflation here in the u.s. they have made that clear. powell has tied future rate hikes to inflation specifically. this is not something that we think will be reversed in the two years. as long as inflation remains low, the fed will be on hold. emphasize,ant to this is not 1990, this is not about inflation. one thing that strikes me about the pain trade, what is the consensus? hear allnsus that we of time is the steepening of the yield curve. that could will happen if you see some kind of readmission of optimism,wth and

yields move higher on the backend. but if inflation did not move higher and we didn't see an increase in global optimism, then i think steepening the yield curve would be a pain trade in the consents that consensus is there already. you could see a flattening as a result of that. first point, this is not 1990. important for investors to understand that. secondly, the steepening yield curve is a consensus trade. taylor: everyone is sticking with me. auctionp next is the block. the treasury department selling $113 billion of longer dated notes in the final full week of 2019. strong finish or the corporate credit markets. that is all coming up next. this is bloomberg "real yield." ♪

taylor: i'm tayler riggs. this is bloomberg "real yield." i want to go to the auction block and begin with asia. japan saw just under two chilean yen of negative yielding two-year bonds. the bid to cover ratio was seven point four times closed. italy sold to billing euros of zero bonds due in 23 months. investors offered to buy 1.8 times the amount sold. the bonds were sold at a slight premium with a yield of -.005%. here in the u.s., the treasury department holding three options this week for 2, 5, and seven-your notes. demand of $32 billion for seven-your notes rose from the last auction. the man for two and five-year notes was lower than average.

elsewhere, corporate credit is looking to finish the year on a high note with high-yield rallying for 16 consecutive sessions. wells fargo weighing in on the recent performance in the junk space. >> across high-yield, you are pulling in 2020 returns into 2019. there is a year and squeeze going on as people scramble, looking for that recovery trade, where can i get the incremental yield, incremental return, how can i set myself up for next year. we have seen a meaningful squeeze in the market. me are collinwith martin, peter tchir, and john bellows. on somei want your take of his comments, that we have pulled a lot of those returns in the ccc space specifically back into 2019. do you see that as being the case? we do to we think it will be difficult to mimic the returns we saw this year in the credit markets, especially

high-yield. we have gotten to a point where spreads are low, prices are high, and the returns we saw this year frankly, will be difficult to follow, unless we see spreads go to all-time low levels. our guidance for investors is to be very defensive, suggest underweight in high-yield bonds, especially the junkie is part, like ccc's. yourutlook is to earn coupon. coupon payments will make up most of the return in 2020. taylor: peter, your take on credit in 2020? into december looking for this squeeze across the board. the first step is figuring out which credits benefited unfairly by the squeeze, start selling those. there will be a return to weakness for those weaker credits. we like cyclicals, autos, commodities. certain names were beat up that are sent to come back. i think those can continue. it will be difficult for managers to figure that out, but that is what you're supposed to be doing with your portfolio

now. figure out which of those weaker names have upside, adding to them, and then cutting losses on those that have a surprising rebound. taylor: the dallas fed president robert kaplan weighed in on the credit market, saying those tighter spreads might be cause for concern. bb credit spreads are so tight. bbb spreads are very tight. if i see the market is distinguishing between lower quality credits and better credit, i think that is an encouraging sign. my bigger worry is, you have got , historically low cap rates, tight credit spreads, and i'm just keeping a close eye on excesses and the balanc -- imbalances. taylor: john, do you agree, tight spreads, a cause for concern? one think he has highlighted, there has been

differentiated. , historically low cap rates, tight credit spreads, triple c's have lagged, a recovery in december, but disappointing performance this year relative to the broader market. that is an important point. in that environment, managers that have the ability to do the fundamental credit work and differentiate between names and , are really best positioned to outperform. our team has done a great job on that. that will be the key going forward, to do that differentiation that president kaplan is talking about. it is not just buying the highest yielding bonds. you have to do that differentiation, have to be a fundamental manager in order to perform well. taylor: what is the high-yield market telling you what spreads at 3.26, down from 5.50 a year investorsn collin: are not being compensated for taking on at high risk that they offer. with the you look at aaa's down to single be, if you look at the

tiers of each market, they are close to the post crisis lows. the only types of bonds that have spreads above that is ccc. you are not being compensated. with high yield, it is not out of the ordinary to see spreads moved sharply. are, there is less of a buffer for investors to offset some of that. taylor: peter, we were looking at the chart. it is shocking to see high-yield investmentd than grade at 97 basis points. what looks more overvalued to you? peter: i am fairly comfortable with credit here. we all talk about reversion to the mean. you go back to the early 1990's, we spent all the 90's at these credit levels, most of the 2000 at these spread levels. it will turn out that investors were overcompensated to take

credit risk the past seven years, and we could normalize. we will see a world of bbb credits, where single-a moves bbb,to bbb, bbb holds a and maybe if we get a recovery in the economy, bb getting upgraded. we will look back and say, what was the problem about bbb spreads? we saw this year, as companies were going through the debt diet, those companies that got in at the investment grade level could turn themselves around. i think we will probably not see a ton of spread type thing from here, but i don't think we would go back to widening. people will have to find the opportunities in those beaten up cyclicals, those names that were undervalued. people will be searching for yield, and that is where they will find it. john, i want to read marquise from pimco's

who thinks the strength and high credit is here to stay. he says there is not enough high-quality and assets to meet the demand. marquise that is the reason credit did so well this year, not just the fact that the fed and other central banks cut rates. it is just that there is that much demand. does demand continue in 2020? i think the fed is a big component of this. theyfact that the fed and other central are accommodating in policy. reducing one of the major risks and credit, reducing the recession risk. another thing the fed has done by bringing down rates is reducing the hedging costs for foreign investors who want to buy credits. i think both of those are positive. the fed is definitely a part of the pro-credit story. i want to come back to the idea that there is differentiation within the credit market, and managers can take advantage of that. we have noted that energy credit has really lagged. lagged event has

though management teams are being very prudent with their balance sheets. you see asset sales lagged in oo manage their maturity schedules, bring down leverage in some cases. and yet, spreads are still quite wide to the markets. energy would be a case where prudent balance sheet management from the leadership and those companies is a positive. spreads are not reflecting that. that is where you could take some risk. belor: everyone will sticking with me. still ahead, it is the final spread. this week features manufacturing data out of the u.s. and china before closing out the year. this is bloomberg "real yield." ♪

taylor: i'm tayler riggs. this is bloomberg "real yield." time for the final spread. coming up over the next week,

monday, chinese pmi in u.s. wholesale inventories. tuesday, the bond market closes early ahead of new year's day on wednesday. thursday, china manufacturing pmi data. friday, minutes of the fed's latest meeting. still with us around a table or collin martin, peter tchir, and john bellows. told usony chris enzi that 2020 will be a year of coupon clipping. if you look it price or coupon in 2020? peter: for the total return investors, you'll have to be careful. it may be a coupon clipping. for spread investors, you can do well. you will have to be aggressive, as john talked about. energy could outperform. you have to be overweight those sectors still have juice in them . you have to time the market. there will be opportunities to buy and sell, rebalance your portfolio. taylor: it is time for the rapidfire around.

how many fed cuts in 2020? collin. collin: zero. peter: zero. john: i will be a little more bullish and say one. taylor: what is the upper bound for the 10-year in 2020? collin: we think two .25. upper bound, 2.5. peter: 2.75. john: for the 10-year treasury? taylor: upper bound. john: 2. taylor: what part of high-yield upper forms? you know what, i will just get one answer their. collin martin, peter tchir, john bellows, thank you both. this is bloomberg "real yield." ♪

mark: i'm mark crumpton with bloomberg first word news. japan is calling on south korea

to help improve ties between the two countries. this comes days after shinzo abe and south korean president moon jae-in met at a summit in china. the leaders agreed to tone down their feud, though they may little progress in resolving disputes. the icy relationship has heard tour is him, and security relations between the two nations. violent protests continue in india. there are military and police forces were deployed in muslim majority districts in a north indian state today. officials also shut down the internet. nearly two dozen people have been killed and 1000 arrested in the nationwide demonstrations. the testers have called for the citizenshipf a new law that excludes muslims. ireland issued more than 900,000 passports in 2019, a record high . applications from its citizens in the u.k. surged amid brexit uncertainty. people with an irish grandparent

or those born in northern ireland are also entitled to an irish passport.