for ournew york city audience worldwide, i'm jonathan ferro. bloomberg real yield starts right now. coming up, tears in china fueling global growth worries, driving treasury yields down to october lows, pushing investors pull cash from junk-bond funds. his back.nd bit >> the treasury market rallying. >> rally in treasuries. >> fixed income yields keep falling. >> we don't have any major inflation risks. >> what inflation?

>> global growth will be relatively weak. >> the fed is on hold. >> the fed is ready to do what it has to do to keep things going. isthe coronavirus scare completely dominating the conversation. >> we can still go lower. >> the message for investors is to find yield. keep your yield. >> you cannot be scared away. once you give the yield away, it is hard to get back. around theoining me table is subadra rajappa, kathy jones, and rob waldner. kathy, when we start a week with sentiment like this, the next week things look the other way and we are vulnerable to a squeeze. are we vulnerable now? kathy: it doesn't feel like it. the squeeze was people were not prepared for this. anyone who was in heavily in leveraged fixed assets has been squeezed out. it doesn't feel like it because

there is no magic wand here. and comeg has to peak back down. that is likely to take time. thethan: one person at table feeling pretty good about life, subadra rajappa. started the year with a target on a ten-year at 1.20. everyone thought you were crazy. we are not far off of it. subadra: this is very different from what we experienced in 2003. pandemic.ars the size of the chinese economy is much larger, coming at a bad time going into the new year's celebrations, and it is now worldwide, impacting travel as well as growth. jonathan: it's been a big issue comparing 2002 22020. let's clear this up, you cannot compare china from 2002 and 2003 2 2019, 2020.

totally different beast. need to separate a direct economic impact, which we know there will be. travel is being limited, factories are not opening. that, for the markets, is a near-term headwind, but not as substantial as the unknown, which is how is this going to pan out. we have to watch carefully how this evolves, how we see the evolution of infected people. , at leaste evidence on a percentage basis, that it's been slowing. but we have a whole weekend ahead of us. thinking back to your original question, if we get good news on this, and the infection rate seems to be slowing, i think you get a bounce higher. jonathan: you have to decide whether this is transitory or not, or whether the economic hit we are about to get will push vulnerable economies, just took them over. kathy: we came into the year

with the idea the global economy is starting to get better. stabilizing, we saw an upturn in europe, the inventory drawdown was a little bit over. the idea was things were marginally improving. now we get the hit. does this take us into a global recession or recession in certain areas? it is too soon to say that, but certainly there is not as much firepower among central banks to counter the downturn as they might have been a couple years ago. jonathan: let's talk about the pmi out of china. 50.0 on manufacturing. people will say that does not capture the story. ey, cutoff for the surv january 21. a lot of things happened after that. right now you are at 50 before you seen a hit. pretty fragile position. subadra: it is not just china.

look at the data we got from italy, france. they all had reasons why gdp in the last quarter slowed down dramatically. pmi in the u.s. as well, chicago pmi, any fracturing has been consistently weak. this is a story that's been ongoing. now you have this excel or in with the coronavirus, speeding up the pace of the economic conditions. jonathan: 30 points move on the 10-year. if we break down the individual components, what is happening with inflation, that is constructive on where this may go. yields predates the scare in china. an important point to make. on top of that, we have inflation expectations rolling over. 1.53 down tofrom your still bullish target of 1.20? subadra: our target was over the course of the year, but it looks like we could get there if things continue to deteriorate.

1.20 at this point seems a little bit extreme. weconditions stabilize, should see treasuries start to trade in a different range. earlier on, we were trading .90.een 1.50 to 1 1.60range may be 1.40 to before we reprice lower. but the decline in real yields has been dramatic, negative seven basis points, closest to the lowest it's been since the qe era. despite the fact that we have had three rate cuts from the fed last year, as well as very easy monetary policy for the ecb. jonathan: the federal reserve has made a massive shift in the last 12 months, huge shift in reaction function. telling the markets, if things get worse, we will be there. if things get better, we will not cap the upside. the market believes they will keep rates low for longer, maybe

even go lower. investors don't believe they can generate inflation, and that's the key difference. i wonder if that is the reason why you take this low rate of you and push this out to the curb. you believe they will keep rates low, don't believe they can generate inflation. kathy: that is what's happening. 's testing the 2% level, near historic lows. you are seeing it all across the curve with the curve flattening. that has been driven by declining expectation for what the fed will do. that component has been driving, the term premium has been driving the decline in rates. that will probably continue. it's a little bit interesting to me that the fed is talking such a big game about inflation as defined by core pce, when all of the other inflation indicators are at or above 2% and rising. that being said, that's their benchmark. fed is much the

more dovish than they been in a long time, as long as i've been in the market. the market is recognizing that. if this tail risk realizes, the fed will give a stimulus. even though the market rallies, 2/10's are looking ok. the potential tail risk, and knowing that the fed will cut quickly. jonathan: the point we are trying to make, the point that kathy is trying to make, is they may have control over short rates, but they don't have control over what is happening with 10 and 30's. does that resonate with you? rob: 2/10 has stayed flat somewhat. to shift the whole curve down, we haven't seen a massive inversion. we have seen it shift down with bullish flattening. i think that is somewhat about fed expectations. jonathan: what are you looking

for? subadra: the curve could continue to flatten. the back and will rally. that is the action we have seen. the fed is stuck between a rock and a hard place. they have weakness in some data segments, but financial conditions broadly speaking are still very easy. that is why the front end is pegged. then, the backend is rallying, and you are seeing a flattening of the curve. not a serious inversion like what we saw in august, but that will be the balancing act for the fed. financial conditions and providing accommodation. jonathan: your view on the shape of the curve is independent of the fear in china run the coronavirus? your view is independent of those things? subadra: it is never independent. jonathan: but to get that flatter curve in the way that you anticipate, independent of

things in china as they stand? subadra: the way i thought the curve reshaping would work out, you see weaker data and the curve will flatten like it is doing now. then the market would start pricing in cuts, and that would cause it to steepen. we just haven't gotten to that leg of the trade. kathy: we have what we call the big dipper configuration. as subadra says, the front end but we are starting to see 2, 5 young yacht dip down. as long as this continues, we will see the ball side. jonathan: coming up, the auction block. the primary market coming to a standstill as the coronavirus puts issuers on hold. that conversation is coming up next. this is bloomberg real yield. ♪

jonathan: to the auction block and up to speed on what's been happening with issuance in asia. there were no deals this week amid rising concerns in china. with ending to a big month dollar sales topping $40 billion, a record for any january. investment-grade debt falling short of weekly estimates. it was enough to make january the second-biggest on record. in high yield borrowers remaining on the sideline. just $3 billion, down sharply from the more than $14 billion last week. junk bonds heading for their second and second of loss. add.have been trying to bb's have outperformed in the near term in this risk of environment.

we will see if that persists. still see value. there is such a disconnect between high quality high-yield and lower quality. around the table is subadra rajappa, kathy jones, rob waldner. rob, what is happening with high yield? equities are down aggressively to end the week. do you step back in or not? rob: being here on friday, you have to be careful about the weekend, you have to track the virus. but we think this is a buying opportunity. we think the economy will see potential growth. we think the fed continues to be easy. they have told us that they will continue to this non-qe-qe. the problem for us has been valuations. if you get a correction in valuations, i think that's an opportunity. we agree with greg, the opportunity is down in the

credit sector. b's had a tremendous rally last year. we think there is some opportunity in the lower quality. jonathan: monday, chinese markets reopened. that is a tough one to be long opening up into. will: my guess is they open up under a tremendous amount of pressure as people try to catch up with the selling. our view on high yield is we have been looking for spreads to widen before this, but you could get 4.50 on the index pretty quickly. 4.25. i wouldn't dive in until you get a better evaluation. subadra, that is what some people are grappling with. the move in spread over two weeks, 70 basis points. it's meaningful. but the level historically is still quite rich. subadra: yes. everything is trading rich, as long as the fed is providing accommodation, the expectation would be that you take on more

risk. that is what you are seeing in the credit products as well as equities. in some respects -- i know it but you haverds -- to see a meaningful correction in risky assets for the fed to start providing more accommodation. financial conditions remain easy, it will remain hard for the fed to make an argument to cut rates. jonathan: you are going to hate the next question then. below four hundred basis points. december 2018, the primary market, high yield shut down, the fed was almost forced to make a pivot because of what was happening in credit. what gets the fed back to the table? i don't want an s&p 500 target, perspective,edit what makes the fed come deck to the table and say, it is time to ease again. subadra: that's a tough question. if you listen to richard clarida in the previous program, what he said was asset prices are not

the concern of the fed. they are more concerned about economic fundamentals, distributive those economic fundamentals, but it has to be in the back of their mind, that the more they ease, the more risk-taking there is. jonathan: i am off-camera laughing because we know the monetary policy has been through financial conditions. if they seize, they respond. kathy: the market is expecting that the fed will step in, and the requirement is financial conditions have to get tight. i don't think, absent a big decline of the real economy, that they are necessarily going to move. if you see financial conditions move, they will assume the real economy gets worse. investorsthe problem have got, it is value, where'd you get it from? we are going through a growth scare where we had a ford multiple on the s&p 500 at 19, and credit cycles were tight on

high-yield. let's talk about tesla a little bit. ranking, that maturity, coupon at 5.3%. record low. everyone spent the next 18 months saying it should never have priced in. this week, the yield dropped below 5%. drop low 5%. rob: tesla isn't in your consent -- idiosyncratic story. it is no surprise valuations are tight. the macro structure of the market is supportive of risky assets. stable growth, no inflation whatsoever, and the central bank is supportive. not a surprise we had tight valuations. that is why you use this correction to look for opportunities. assuming we get this virus contained, you have to be able to buy back.

jonathan: you say the macro backdrop is extreme a stable. i look around and i don't see any stability at all. where are you seeing it? monetary policy is supportive. rob: growth is trending around 2%. europe is probably around one. jonathan: you think it is stable there? rob: last quarter. 1% is not a high level growth. but that is what the potential is in europe. we are talking about solid growth. we will have markdown chinese growth for this virus, but we etsnk, as long as this g contained, we will manage through it. that is good for financial markets. kathy: the problem we have in the credit markets, corporate profit growth has slowed down. although the economy is doing ok, corporate office have not done well.

the expectation is they will rebound, but in this environment i'm not sure they are going to, particularly if you see exports contract from here. on top of valuation, there is yield curve. lending yield curve has never been good for high-yield. as far as i can tell, it is generally correlated with a widening of spreads because it is indicating a prospect of slower growth in the future. although some of the economic fundamentals underneath this ituation are ok, assuming passes, we go back to whatever normal is, but i'm not sure that the macro picture is all that great. to me, there is a big, important point. there is also a lot of global demand for bonds in the u.s. we look at the ecb purchasing corporate bonds, interest rates -- the universe of negative yielding assets is quite large. the data from

japan, lots of demand for u.s. corporate bonds. economicgh the macro environment may seem dicey, you get the best yield, you get the most return for your money by investing in the u.s. rob: the only problem with that is as the yield curve flattens, that demand will go away. jonathan: we will leave it on that point. coming up on the program, the final spread. the week ahead, featuring big reit's on global manufacturing, and u.s. payrolls report. this is bloomberg real yield. ♪

jonathan: i'm jonathan ferro. this is bloomberg real yield. week, up over the next some big economic data points, including manufacturing pmi's out of the u.s., china, and eurozone. u.s. ism numbers, president

trump delivering the state of the union address, and we hear from christine lagarde on thursday. friday, the u.s. payrolls report. their final thoughts, kathy jones, subadra rajappa, rob waldner. that the friday. become a nonevent considering everything around us? almost everything has become a nonevent tracking the coronavirus. it will be an important data point. manufacturing will be important next week, given we had a week chicago pmi. of in the correlation of chicago pmi and ism manufacturing is also not great. one more data point on the week manufacturing sector. in jobthat any slowdown growth, the markets will not take that well. kathy: wages will be the big one. we have seen a little leveling off in wage growth, but if that

continues or turns down, that will be a significant number. rob: very little uncertainty around the labor market. jobs number comes in pretty close, not much of an issue. jonathan: let's get to the rapidfire round. three quick questions, answers around the desk. beginning with the coronavirus. the economic impact, transitory or long-lasting? subadra: long-lasting. kathy: long-lasting. rob: transitory. jonathan: can we retest the september low on the u.s. 10-year yield? yes or no? kathy: yes. rob: yes. subadra: yes. jonathan: does the treasury curve and the yields steeper or flatter than where we are right now by years end? steeper or flatter? at the time i asked the question, 2/10 19 basis points. rob: steeper. subadra: steeper. kathy: steeper.

jonathan: what a week it's been for the bond markets. jones, subadra rajappa, rob waldner, thank you very much. from new york city, that does it for us. for our audience worldwide, this was bloomberg real yield. this is bloomberg tv. ♪ good morning!

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download the my account app to manage your appointments making today's xfinity customer service simple, easy, awesome. i'll pass. mark: i'm mark crumpton with bloomberg first word news. alaska republican senator lisa murkowski says she will vote against additional witnesses and president trump's impeachment

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