. we're here to make life simple. easy. awesome. ask. shop. discover. at your local xfinity store today. >> alisa abramovitz in for jonathan ferro. bloomberg real yield starts right now. lisa: bank executives in davos wrapping up their calls to end negative rates. with credit markets remaining hot, new deals as much as seven times oversubscribed by prompting new fears on wall street that the party may be nearing an end. let's start with the big issue, rising debate over the impact of negative rates. the business community doesn't want just lower rates. >> negative rates are a problem. >> negative rates are useful for

the economy as a whole. >> 02 negative interest rates. >> you'll have asset bubbles. >> you want to ride that wave while it's happening. >> rates, negative or not to stay low. >> keep your eyes wide open for when there's a correction. in the medium-term, this cannot be the way that you manage a real economy. lisa: banks don't like negative rates. john and you around the table in new york is deal of us mark lindbloom, and sam dunlap. mark, negative rates. are they going away anytime soon? >> probably not. however, a lot of the press we are seeing here, negative rates and what a bad thing they are, it is not as if central banks around the world, ecb as for that.

they're made it is inflation and economic growth. they are responding to that. secondly, there's a lot of optimism around the world right now, a goldilocks situation. the change in that recently. there is room for downside there. that growth is yet to come. we think the prudent measures of the ecb and others are justified. third point we would make is the folks are doing this is a bad thing, you have to look at the opposite and say what if this hadn't happened with the world and europe in particular being a better place. while we don't like it as much as others, we think it's not a place to be invested, we think they are sticking with their mandate. lisa: you like negative rates? >> definitely better than the alternative post crisis. a depression like outcome would not have been a good solution. the ecb's position toward negative rates in this year long

pause that lagarde has been clear on as they rethink some of these policy issues, negative rates are on the table to perhaps end. certainly has punished european banks. u.s. banks have been a star performer in the post crisis period. negative rates sound great and very but they actually hurt the transmission mechanism of the european economy. i think it would be prudent that they stop and end the negative rate policy in the near-term. lisa: two things going on. perhaps a problem with banks, transmission mechanism that may have been negative. as far as helping to boost inflation and growth, a positive. the question that was raised by some of those interviewed in davos, has there been a bubble created as a result of some of these measures? i don't think risk asset valuations in europe are particularly rich. influenced risk

asset valuations, it doesn't seem to be bubbleishous. there is a really dichotomy between how negative rates seem to affect real economies and financial economies. if you look in regions that have very low competition in the banking sector such as scandinavia, that have instituted negative interest rates, they have less negative side effects of those negative rates. using the word negative too many times, but you get the idea. you haverozone, greater banking competition, 50 or so decent sized banks. that is were the problem emerges with negative rates. can offset some of the negatives, you can end up with a net benefit without attraction. guess is the less competitiveness of the banking system in scandinavian regions

means banks can charge water spreads on loans and make up for those problems. lisa: meanwhile, we are talking about european risk assets. how much are the low rates fueling some kind of flight to the u.s.? i'm watching the gap between u.s., german 2-year bond yields. narrowestugged to the since 2017. i wonder how much this is european investors flooding into the u.s. to take it vantage of that extra yield, pushing yields down here. what do you think, mark? mark: no doubt there is a tremendous amount of savings around the globe. we have seen that from all of ,ur offices around the globe inflows from asia, europe, around the world, into the u.s. as the high-yielding country of the world. that has certainly been a key factor with recent inflows and

the support of bond markets. , weother side of that is get back to this idea of growth and inflation, and the central banks, the ecb is doing the right thing. growth is ok, not great. there could be softness, but we know that the guiding light has been this low inflation. with inflation where it is, it seems wise to us that people buy bonds because inflation is low, or as a diversifier to their global portfolios. no doubt the low yields are giving the u.s. attention, but i will also argue the investor euphoria created on the heels of the recent fed balance sheet and fund flows are driving fixed income performance and lower yields, despite the turn in the macro data. the macro data is looking to be a bit writer as global pmi's looked to be reversing. clients are looking for high-quality, stable income, but cautious on the long and.

there could be pressure if the data surprises to the upside, or the inflation data begins to turn. the: what do you think of idea that foreign investors are increasingly coming to the united states? is that what we are seeing on a day like today? guy: no. one of the big changes in financial markets over the last 7, 8 years is that foreign financial institutions buying outside of their home currency bonds essentially have to hedge foreign-exchange rates. the cost of those hedges right now more than overwhelms the yield differential in many cases. one of the biggest funders in the u.s. treasury markets of budget deficits are not participating heavily. that is one reason why you see huge amountuying a

of treasuries. we only have data through the third quarter of 2019, but the preceding year leading into that, u.s. banks, big banks in the u.s., but $254 billion of treasuries net. they are putting one quarter of the u.s. budget deficit because foreigners are not buying. the yield differential looks large onc. once you take into account the foreign-exchange market, it is not. lisa: you are pointing to the shift from foreign demand to domestic demand. i wonder how much the fed is fueling this with their repo facilities. they say it doesn't count, it's quantitative easing. how much is that which is going on? mark: the federal reserve has been concerned about the reserves on the system. we think they done a good job maintaining the fed funds level three and 1.5 and 1.75. we are not so concerned about

them into new to a coverage that. there was a big scare at the end of the year with the level of reserves, what we may see rates do over the turn. we thought they did a good job getting in front of that. we see them continuing to provide reserves, whether through that is a continuation of buying bills, repose, or some combination, we are not concerned. supportive, though, of the treasury market. lisa: do you agree, sam, that this is supportive, but not qe? sam: the debate about whether it is qe or not, the balance sheet expansion is undeniable. orther you want to kona qe term repo, it is what it is. the key is the fed is committed to expanding the balance sheet, along with the powell pivot, which fueled fixed income performance in 2016. then you have the term repo at the end of 2019 which further

fuel the rally we saw in traditional fixed income. that spilled into 2020. it's very important that the fed is expanding the balance sheet. they had a midcycle easing campaign long before we had a recession. that is positive for risk assets. that is why you are seeing the global macro data turn here. lisa: do you agree it's been supportive of risk assets? time, soid no less this time i have to say yes. what has offset a lot of the fed liquidity release has been a buildup in the general account. lisa: we will have a three-part series on the tga. coming up, the european bond markets starting the year and record fashion. that conversation is coming up next. this is bloomberg "real yield." ♪

lisa: i'm lisa abramowicz. this is bloomberg "real yield." let's begin in europe, where one of the riskiest corners of the bond market is enjoying its busiest january ever. running upborrowers 7 billion in euros this week, putting monthly sales close to the 10 billion mark. monster demand keeping u.s. great investment issuers. $20 billion this week. slideboosting the monthly to over $118 billion. staying in the u.s., where the junk-bond market priced eight deals on thursday alone. monthly issuance topping $30 billion, the most for any january in more than a decade. warning about the

impact of loose monetary policy on debt rockets. >> when you look at the amount of leverage in corporate america and where we are today, you definitely are inflating a bubble here in credit. d labarre, mark lindbloom, and sam dunlap are still with us. i have to say, guy, i'm looking at yields, the bond yields are at their lowest ever. certainly at the top tier of junk bonds. is this looking a little frothy? guy: spreads are tight. what we tend to see in a high-yield market is that spreads can remain tight for a long time. they spend most of their life in the bottom quartile of tightness and then explode higher based on outside catalyst. yes, they are tight. they will probably remain absent any outside catalyst. but that is a pretty lousy risk reward opposition, particularly

if you're an investor in securities. lisa: sam, agreed? sam: we agree credit spreads are historically tight. some concerns in corporate credit that scott pointed out. the increased leverage we have seen in corporate america, some of those fundamentals from a high-level appeared to be a concern. it is worth noting, if you look back to 2019, bbb corporate's one of the most disdained asset classes on the planet going into the year. the powell pivot, balance sheet expansion, certainly fueled an excellent year for bbb corporate's. the balance sheet expansion and the accommodative fed policy is helping those asset classes. i think the onus is on market participants to look at other areas of high quality credit. credit spreads can remain stable.

there are improving areas in u.s. credit, residential mortgage, for example. lisa: which you specialize and invest in. sam: that's an area that is improving postcrisis. there are unique opportunities. cautiousou have to be toward areas that have a lot of interest rate sensitivity. interest rate sensitivity could hurt those longer run performance numbers. lisa: is has been a theme i've been hearing. not a great risk reward risk proposition. we talk about high-yield bonds. are you just avoiding it, being selective? do you agree with that thesis? for bond guys, we are pretty optimistic. we think the economy will be ok. around 2.25. lisa: that is a bond present being optimistic. we think the economy will be ok. mark: given all of that,

however, we don't think it will be another 2019, which was spectacular, no matter how you look at it. hard to find things that went down. we think this year will be much more selective. sort of a bond pickers market, if you will. what we've been doing based on that is reducing below investment grade pricing en the riskly, giv reward we are talking about. similar in european. where we do find value are things like bank loans, which have not been doing well. clo's have been bloodied in the last couple months. lisa: when did you start the shift? mark: fourth quarter, particularly november. i have to be careful in picking those names in the primary and secondary market, but we see much better value there. the other area we have not talked about where we feel there is a lot of value -- the name of

the show israel yield -- emerging markets. those are the three where we are being very selective, unlike last year where many parts of the market were doing well. lisa: how much is contingent on the dollar weakening? mark: it depends. we are about half and half an hour domestic market portfolios. we do think this year will be better for the local bonds as well as those currencies, if those fundamentals hold up the way we think they do. lisa: do you think clo's hold a better risk publication right now? guy: since we are sticking to one word answers, no. the underlying fundamentals of that asset class in the aggregate are far better than they were in 2007, the last time we were super tight credit spreads. liquidity and underlying names are much better.

there is a lot of data to support that. i'm not worried about the underlying credit metrics of the loan market. what i'm worried about is there has been a noted deterioration in the strength of the hands of the holders. it used to be a very heavily private investor supported market. you see people like kkr rotate out of the market, and you see increasing entities like mutual funds on the margin fund that. it is not the fundamental credit quality that concerns me. it is the holders and the itchiness of their trigger finger relative to the liquidity in the market. lisa: i'm looking now at a modi's report that came out today, taking a look at loan covenants and how they steadily weakened through the year. how much of this is a concern? sam, you focus on mortgage credit. that is where people are worried about underwriting standards.

have you seen those weaken as well, have those been persistently strong postcrisis? residential underwriting standards has been persistently strong. i don't know if anybody has gotten a mortgage lately, but it is pretty strong. lisa: it's a pain in the neck. qualifiedow from the mortgage rules, the requirement sick i collate the borrower's ability to pay, we have seen a paradigm shift in residential credit mortgage underwriting postcrisis, whether agency or nonagency mbs. the integrity of the process is completely different. that is why we have seen improving credit fundamentals. not only has the underwriting improved but you have seen the collateral, u.s. homes have been steadily rising postcrisis, thanks to the fans reflationary campaign. lisa: still ahead, the week ahead featuring the fed's first

rate decision of the new year. everyone expects them to be on hold. we will talk about whether that could change later in the year. that is next. this is bloomberg "real yield." ♪

lisa: i'm lisa abramowicz. this is bloomberg "real yield." over the next week, on monday, new u.s. home sales, durable goods, and consumer confidence tuesday. fed rate decision on wednesday. that is the bank of england on thursday. u.s. gdp. guy lebas, mark lindbloom, and sam dunlap are still with us. interesting to see how going forward will be looking at what ,s going on with central banks and everyone expects them to stay put. is there anything that could change that?

do you think the fed could cut by the end of the year? mark: it's possible. we don't expect them to do anything in 2020, but more likely a cut that increase. i think it's a very high bar for them to increase interest rates this year. based upon what chairman powell has said in terms of higher and persistent inflation, even if we saw stronger growth and inflation percolating toward 2%, we don't think they are likely to move quickly. is high probability thought they do nothing in 2020. sam: completely agree with everything mark said. i would just underscore the point that he made about seeing persistently high inflation before the fed actually tightens. that is really important for market participants as we look ahead. the fed wants to see very high inflation in my view, to run things much hotter than where they been post crisis. they have been persistently below their target rate throughout the post crisis in tow.

,his balance sheet expansion along with the midcycle easing campaign, they will get their overtime. guy: two or three cuts, largely in the middle of the year, driven by market plumbing problems. the same as the repo mayhem we had in september. but that is not why they will cut. lisa: interesting. no, no, two or three more cuts. time for the rapidfire round. three quick answers. next,will be seeing 10-year treasury yields at 2% or 1%? guy: neither. lisa: you have to pick one. guy: 1%. 9 2. sam:. lisa: ccc rated debt, buy or sell? guy: mark: by. cell. lisa: which do perfect over the next six months, high or

investment-grade debt? --a: you cannot answer it garland barr, mark lindbloom, sam dunlap, thank you so much. buy ccc potentially as risk on continues. from new york, that does it for us. jonathan will be returning next friday. from new york, this is bloomberg "real yield." ♪

mark: i'm mark crumpton with bloomberg first word news. the pentagon says 34 american troops suffered traumatic brain injuries in this month's iranian

missile strike on an iraqi airbase. a pentagon spokesperson says have a return to work and half are under medical of observation. president trump initially said no troops had been injured in the january 8 strike. that somefirst report soldiers have been hurt, the president referred to them as said thes" and injuries were not as serious as loss of limbs. u.s. health officials are about to confirm a third case of the wuhan virus in the u.s., according to three senators speaking to reporters. arlier, the cdc confirmed second case in the u.s., saying a chicago woman in her 60's is infected. wuhan,nth, she visited the city at the center of the outbreak. officials are monitoring more than 60 people in 22 states. the virus has killed at least 25 people in china and sickened more than 800. in france, workers