to manage your appointments making today's xfinity customer service simple, easy, awesome. i'll pass. jonathan: from new york city for our audience worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, how fears in china fueling global growth worries, driving treasury yields down to october lows, pushing investors to pull cash from junk-bond funds. the big bond bid is back. >> we have seen this risk of terror. >> the treasury market rallying. >> rally in treasuries. >> fixed income yields keep falling. >> yields are incredibly low. >> we don't have any major inflation risks.

>> if you look at inflation, 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. >> the coronavirus scare. >> the coronavirus. >> the coronavirus scare is completely dominating the conversation. >> we can still go lower. >> the message for investors is to find yield. keep your yield. >> interest rates will be even lower for even longer. >> you just can't be scared away. once you give the yield away, it is hard to get back. jonathan: joining me around the table is subadra rajappa, kathy jones, and rob waldner. kathy, typically when we start a week with sentiment like this, the next week things flip 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. and anyone who was heavily in leveraged fixed assets has been squeezed out. so it doesn't feel like it because there's no magic wand here.

this thing has to peak and come back down. that's likely to take time. jonathan: one person at the table feeling pretty good about life, it's subadra rajappa. started the year with a target on the ten-year at 1.20. everyone thought you were crazy. we're not far off of it now. subadra: this is very different from what we experienced in 2003 and when the stars pandemic was a scare because the size of the chinese economy is much larger, it's coming at a bad time going into the new year's celebrations, and it's now worldwide. it's impacting travel as well as growth. jonathan: it's been a big issue, comparing 2002, 2003 to 2020. let's clear this up. you can't compare china from 2002 and 2003 to 2019, 2020. totally different beast. rob: we 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? so, we need to watch carefully how this evolves, how we see the evolution of infected people. we see some evidence, at least on a percentage basis, that it's been slowing. but we have a whole weekend ahead of us. we have three days worth of information. so thinking back to your original question, jonathan, 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're about to get will push vulnerable economies, just took them over. kathy: yeah, i mean we came into the year with the idea the global economy is starting to get better. the pmi's were stabilizing, we

were seeing an upturn in europe, the inventory drawdown was a little bit over. the idea was things were marginally improving. and now we get the hit. and does this take us into a global recession or recession in certain areas? i think it's too soon to say that, but certainly there's not as much firepower among central banks to counter the downturn as there 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. the cutoff for the survey, january 21. the big effort to curtail some of the things happening in china, january 23. you have chinese pmi's setting at 50 before you've even seen a hit. pretty fragile position. subadra: yeah, it's 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. but pmi in the u.s. as well, we've got chicago pmi. manufacturing has been consistently weak. this is a story that's been ongoing. now you have this accelerating 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's constructive on where this may go. the move in yields predates the scare in china. that's an important point to make. on top of that, we have inflation expectations rolling over. what gets me from 1.53 down to your still bullish target of 1.20? subadra: well, our bullish target was over the course of the year. now it looks like we could get there if things continue to

deteriorate. 1.20 at this point seems a little bit extreme. but now if conditions stabilize, we should see treasuries start to trade in a different range. we've been trading earlier on in the year, we were trading between 1.50 to 1.90. that range may be 1.40 to 1.60 before we get some information that's going to reprice us even lower. but the decline in real yields has been dramatic, negative seven basis points, which has been 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, a huge shift in reaction function, essentially telling the markets if things get worse, we'll be there. if things get better, we won't 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: and that's what's happening. the 30-year's testing the 2% level, near historic lows. you're seeing it all across the curve with the curve flattening. and a lot of that's been driven by declining expectation for what the fed is going to do. that component has been driving, the term premium has been driving the decline in rates. and you know, 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. but that being said, that's their benchmark and that's what they are doing. rob: i think the fed is much more dovish than they've 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 us a lot of stimulus. even though the market rallies, 2/10's are looking ok. i think this is mostly about the potential tail risk and knowing that the fed is going to cut quickly. jonathan: the point we're 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 not resonate with you? rob: it does, but 2/10 has stayed flat somewhat. to shift the whole curve down, we haven't seen a mass inversion of the curve. we've seen it shift down with bullish flattening. i think that's somewhat about fed expectations. jonathan: what are you looking for? subadra: the curve could continue to flatten. the back end is going to rally. that's the action we've seen. the fed is stuck between a rock and a hard place.

they've weakness in some data segments, but financial conditions broadly speaking are still very easy. that's why the front end is pegged. the front end is reticent to price in the cuts we've seen in august of last year. then the backend is rallying, and you're seeing a flattening of the curve. not as 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 whole view of the year independent of those things? subadra: it's never independent. jonathan: of course, 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've got what we call the big dipper configuration. as subadra says, the front end is pegged, but we're starting to see 2, 5-year dip down. as long as this continues, we will see the bull side. jonathan: coming up, the auction block. the primary market coming to a standstill as the coronavirus puts issuers on hold. that conversation is up next. this is "bloomberg real yield." ♪

jonathan: to the auction block now and get you up to speed on what's been happening with issuance in asia. there were no deals this week amid rising concerns in china. tepid ending to a big month with dollar sales topping $40 billion, a record for any january. sales of u.s. investment grade debt falling short of weekly estimates. nevertheless, there billion dollars it did price was enough to make january the second-biggest on record. in high yield borrowers remaining on the sideline. this week's volume just topping $3 billion, down sharply from the more than $14 billion last week. sticking with high yields, john junk bondsnds -- heading for their second weekend of loss. >> i've been trying to add, actually, so bb's have outperformed in the near term in this risk of environment. we'll see if that persists. still see value.

there is such a disconnect between high quality high-yield and lower quality. jonathan: around the table is subadra rajappa, kathy jones, rob waldner. rob, what is happening with high yield? equities down aggressively to end the week. do you step back in or not? rob: well, i think 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 solid potential growth. we think the fed continues to be easing. they've told us that they will continue to this non-qe-qe. so for us, the problem for credit recently has been valuations. and if you get a correction in valuations, i think that's an opportunity. i also agree with greg, the opportunity is down in the credit sector. bb's had a tremendous rally last

year. the valuations don't look that exciting. we think there's some opportunity in the lower quality. jonathan: monday, chinese markets reopen. that's a tough one to be long opening up into. kathy: my guess is they'll open up under a tremendous amount of pressure as people try to catch up with the selling. so, 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, 4.50. i wouldn't dive in until you get a better value here. jonathan: subadra, that's what some people are grappling with. the move in spread over two weeks is about 70 basis points. but the level is 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's what you're seeing in the

credit products as well as equities. in some respects, i know it sounds sort of backwards but you , have to see a meaningful correction in risky assets for the fed to start providing more accommodation. because, you know, financial conditions remain easy, it will remain hard for the fed to make an argument to cut rates. jonathan: you're going to hate the next question then. so, we are below 400 basis points. we know that 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, but i'm just wondering, from a credit perspective, what makes the fed come back to the table and say, you know what, it's 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 aren't the concern of the fed. they're 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'm off-camera laughing because we all know the monetary policy has been through financial conditions. if they seize up, they respond. kathy: and i think that's what the market is looking for and 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're necessarily going to move. if you see financial conditions conditions move, they're going to assume the real economy gets worse. jonathan: the problem investors have got, its value, where'd you get it from? we're 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. that credit ranking, that maturity, coupon at 5.3%. record low. and everyone spent the next 18 months saying it should never have priced in. this week, the yield dropped below 5%. tesla debt, 2025 dropped below 5%. where are you getting value now? rob: tesla isn't in your consent -- idiosyncratic story. it's not surprising the valuations are tight. the macro structure of the market is very supportive of risky assets. stable growth, no inflation whatsoever, and the central bank is supportive. so it's not surprising we had tight valuations. that's why you use this correction to look for opportunities. presuming when we get this virus contained, you have to be able to buy back these assets. jonathan: you say the macro backdrop is extremely stable. i look around and i don't see

any stability at all. where do stability? monetary policy is supportive. rob: growth is trending around 2%. europe is probably around 1%. jonathan: you think it's stable there now? rob: i think it's stable. last quarter. 1% is not a high level growth. but that's what the potential is in europe. we're talking about solid growth. we'll have markdown chinese growth for this virus, but we think, as long as this gets contained, we'll manage through it. that's growth. that's not exciting, but that's good for financial markets. kathy: the problem we have in the credit markets, corporate profit growth has slowed down. so although the economy is doing ok, corporate profits have not done well. the expectation is they'll rebound, but in this

environment, i'm not sure they're going to, particularly if you see exports contract from here. on top of valuation, there's high 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's indicating a prospect of slower growth in the future. although some of the economic fundamentals underneath this situation are ok, assuming it passes and we go back to whatever normal is, but i'm not sure that the macro picture is all that great. subadra: to me, there's a big, important point. there's also a lot of global demand for bonds in the u.s. if you look at the ecb purchasing corporate bonds, interest rates are -- i mean, the universe of negative yielding assets is quite large. if you look at the data from japan, lots of demand for u.s. corporate bonds from overseas. so even though the macro economic 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 that the yield curve flattens. that demand will go away. rishaad: good point --jonathan: good point, as well. we'll 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." it's time now for the final spread. coming up over the next week, some big economic data points, including manufacturing pmi's out of the u.s., china, and eurozone. plus, 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. with me for a quick final thought, kathy jones, subadra rajappa, rob waldner. that friday, become a nonevent -- did payrolls friday just become a nonevent considering everything around us? subadra: almost everything has become a nonevent tracking the coronavirus. but it's, you know, it's still going to be an important data point. manufacturing will be important next week, given we had a weak chicago pmi. not trying to make a big deal of one week numbers, but it's kind of in a correlation of chicago pmi, and ism manufacturing is also not great. but still it's one more data point on the weak manufacturing sector. add to that any slowdown in job growth, the markets will not take that well. jonathan: kathy? kathy: yeah, i think wages will be the big one. we've seen a little leveling off in wage growth, but if that continues or turns down, that will be a significant number. jonathan: rob, quickly? 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? transitory or long-lasting? subadra: long-lasting. jonathan: kathy? kathy: long-lasting. jonathan: rob? rob: transitory. jonathan: can we retest the september low on the u.s. 10-year yield? yes or no? kathy? kathy: yes. jonathan: rob? rob: yes. jonathan:subadra? 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 ask the question, tuesday versus tends, 19 basis points. rob: steeper. subadra: steeper. kathy: steeper. jonathan: what a week it's been

for the bond markets. kathy jones, subadra rajappa, and rob waldner, thank you very much. from new york city, that does it for us. for me, we will see you next friday at 1:00 p.m. new york time, 6:00 p.m. in london. for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪ when it comes to using data, everyone is different.

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