jonathan: i am jonathan ferro. this is "bloomberg real yield." ♪ coronavirus fears sending markets into a tailspin. central bankers showing little willingness to step in as corporate issuance drives up treasury yields hit record lows. we begin with the big issue. central banks are ready to step in. >> the fed is divided. they want to take a wait and see approach. they thought they would be comfortably on hold. i think that is still what they want. >> the market is testing the

fed's resolve. >> markets like to see the central banks step in. >> they want the fed to cut. >> i don't the fed will cut. >> i don't think the fed should cut. >> on terry halsey's prepared act -- monetary policy is prepared act, but will be effective? >> the effectiveness would be tremendous. >> interest rates are not vaccines. >> the fed is fairly impotent in this environment. on the other hand if they do nothing, it can make the situation worse. jonathan: joined me the table, subadra rajappa and mike schumacher and victoria fernandez. victoria, in this conversation, we should start with efficacy of the central bank move and the willingness of central bankers to step in. let's start with the latter. we are they? >> we are not seeing them willing to do anything at this point in time. the south koreans did not lower

their rates when people expected they might. you have germany coming out and saying they have enough stimulus on the table right now. they are not willing to lower rates at this point in time. i don't think we will see it from the fed. a lot of people wanted powell to make a statement or at least over the weekend, have a coordinated statement with all of the central banks around the world. i don't think we will see that. i think they are little more on the weight and get this point in time. jonathan: that seems to be the case. lagarde, pretty much say nothing. the central bank at the epicenter of this does not cut interest rates. what you think is holding them back? >> i am sympathetic to their position. they are in a tough spot. this is a classic supply-side shock. it is hard to justify the monetary policy will move the needle when it comes to providing stimulus. at the market is already pricing in for cuts. the one measure we try closely is the first fed contract with

ford. that has inverted. typically any time it inverts beyond 25 basis points, the fed has followthrough and delivered a rate cut. now that curve is a close to -50 basis points. almost certain the fed might have to act because in the last three decades, any time that part of the curve has inverted, the fed has follow-through and cut rates. jonathan: when it comes to the efficacy, do you think that is what is holding them back? the nature of the shock is not something major policy is traditionally good at. is that part of it? >> i think the other thing, too, they're not sure about the progression of the disease. you can see it is spreading, but how bad is a get and how quickly? they don't know and we don't know. i suspect a lot of the public health officials are making educated guesses. we are not sure how this evolves over the next month or two. it is a pretty tough thing to as the fed or any other big central

bank to step in right now. jonathan: deep into the unknown. yields coming down 12 basis points. victoria, it is interesting to me. we have not seen the central bank official at the fed suggest we are going to rate cut anytime soon. in the market bit different in a little bit more. every time they don't lean into this, i think it is a market saying the longer you wait, the more you're going to have to do. would that be your take, too? >> the market has been driving a lot of the fed action over the last 12, 18 months. we see the fed coming out and making a stand on what they want to do, what they think their policy should be. the market has their own reaction and ends up pushing the fed into under to do something. it appears the market is doing something now. we are pricing in three fed cuts already this year? just in the last week? those probabilities have skyrocketed. they are trying to push the fed's hand. i don't think the fed wants to

jump in there because of the efficacy we were just talking about. people are not sending at home saying, if rates were little bit lower, i would be willing to put my health on the line to go out and do something. i think the fed understands that. they have to realize at this point in time it would probably not make a huge difference on a fundamental side but would on the sentiment side and they have to wait if that is something they want to step in for -- weigh if that is something they want to step in for. jonathan: i think the cell is -- sellouts have been evident. mind, weof that in have to think about where monetary policy is going to go. 12 months ago they were able to step in a do three things. lower the policy, ship the reaction. what options are available to them right now? >> this is not fundamentally a problem that can be dealt properly with policy. that said, i worry about the

counterfactual. which is if they don't commit -- let's enter the march meeting and they don't cut rates and they have extraordinarily asative action -- reaction well as correction. at some point they're going to have to react. cuthy not be preemptive and rates and provide that stability, which is what the markets are really asking for. jonathan: the issue is how early this still is and how quickly this narrative has changed in just a week. a week ago on this program i asked three guests at they thought fed rates would be cut in march. he much all said no. fromk later, we have gone the happy talk with v-shaped recovery for some people increasingly relative to last week pricing at a technical recession, not for china, but here in the u.s. of america 20 think it is gone from complacency to overkill kind to the other side? >> that seems to be a bit overdone. when you still have the consumer doing well, things would have to

go really badly very quickly to get a recession in the u.s. in the next couple of quarters. that seems to me it is probably a bit panicky. people probably looking at the s&p in going, oh, it is down 10%, 12%, therefore recession is right around the corner. it is too early. jonathan: we have seen the curve steepen. is that a direction of travel for you at the beginning of a long-term bull? is that how you think of the curve in the shape of it in the coming months? >> we always want to consider the shape of the curve, how they are reacting whether we are getting a bull steepener or bare steepener. because i think so much of it this is being driven by a fear component, sentiment component that is there, and is not something i think is leading to a recession indicator like normally you might anticipate. we're not looking out and saying, this is where we think inflation is going to be 10 years from now. we just have people doing a flight to safety.

i think you have to be cautious when looking at the yield curve right now. you can use it as an indication of sentiment in this point in time, but the fundamentals are much stronger than what that is showing us. i think you have to focus more on the fundamentals because as this passes, as this is temporary and passes, we will get back to those fundamentals and then i think we will see the curve start to shift. jonathan: the difficulty, how do you focus on the fundamentals? if you're a corporate and you're still giving guidance to investors, no one can offer any guidance whatsoever for this year, and if you don't get any guidance, there no conviction to do a whole lot other than by treasury and hide under a rock. what is a circuit breaker you need to see to change that story? >> i think from a fundamental perspective, it will take a while for the data to actually start turning to the upside and for us to get a sense of confidence that this is behind us. china pmi tomorrow i think is going to be very, very important. but data thus far, to me what is troubling, even before the

coronavirus if you look at the fourth quarter data in germany and japan, those countries and italy as well, are all unity -- the growth is already slowing down to risk russian mary levels -- the growth is already slowing down to discretionary levels. jonathan: mike? >> in terms of indicators, probably want to see some evidence the virus has slowed a bit or even perhaps if there is hint of the vaccine i think the market takes a happy pill and we're off to the races. barring that, it is going to be a pretty painful process, i suspect. jonathan: many have said we are gallon -- downing them. if they did step in, do you think that could be the circuit breaker for this market? chairman powell says, it is going to be ok, we will do the , we will be there to do whatever it takes, without be enough? >> it would probably help quite

a bit. why go 25? why not go 50? we just agreed monetary policy is not the elixir. take it in big because you're really giving the market a sugar pill and you want people to feel the confidence boost, give them a real boost. would it be enough? i suspect it would be helping a bit. block,n: the auction markets grinding to a halt. that conversation coming up next. this is "bloomberg." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield."

in europe on the continent where one of the only plan offerings ended up getting pulled due to adverse market conditions, leaving the eurozone and europe facing it second zero issuance day of the week. over the u.s., debt offering totally drying- up without a single sales since july of 2018. mining company cleveland this all high-yield issue testing markets this week offering a $950 million junk-bond to its plan acquisition of ak steel. i want to stick with credit. kathy jones morning of more buses to come. >> we've been cautious on high yields for quite a while as the cost of that debt or the ability to refinance that debt gets more difficult, as spreads widen for some of these lower quality companies, that then you add on a faltering economy, you are really setting yourself up for some disappointment here. our conviction is we probably have a ways to go before this

has played itself out. jonathan: back with this, subadra rajappa, mike schumacher , and victoria fernandez. it was destroyed in 2018 when the primary market -- the fed has to do something. do you think this is the number one thing they're looking at right now on their dashboard? the idea that primary markets are starting to seize up worldwide? >> i think it is one of the things they are watching. liquidity in the markets is extremely important and if that liquidity starts to dry out, yes, the fed will step up and do something, and central banks. but i don't think we are that point right now. people are pulling back on the issuance they are saying. we have had spreads widened out on investment grade and high-yield, but it is not that they are so far out at this point in time. they're just getting back to around the historical averages because we have been so extremely tight. if we continue to see a move, although it has been done in a small timeframe, if we continue to see the move whiter, the

perhaps it becomes more of an issue. right now i think it is just like everything else the fed is doing, they're just watching and waiting and seeing if it starts to return to prior levels before the coronavirus. jonathan: how would you frame things, mike? really quite quickly they have spread. is it the nature its feet of the move that they will be uncomfortable with or the level they will look at insight, we are still comfortable with this? >> probably the speed more than level. our team has been negative on high-yield for a while, same basic argument, probably more of the speed. it is somewhat scary. i doubt that alone will disconcert the fed too much. jonathan: last time when a growth shock and oil spread. of 800.re north completely different world. do you see the parallel between what we are experiencing right now and the growth scare of say

2016 where high-yield really flattened out of it? >> 2016 was unique because you're the sharp correction in oil price. there was a global growth stability type situation, demand instruction. we are not there yet. oil prices are still holding up for the most part. also this time around, the thing that is different between spreads widening this time around versus last year is that as treasury yields are rallying come the magnitude of the widening has been a lot more this year relative to last year. blaster we saw some widening of high-yield rights by this time around it is a little more pronounced -- which to me, is a little concerning to the point that kathy was making, that are there certain sectors that these markets that are going to come under pressure needing to default as conditions? deteriorate? jonathan: victoria lasher there was a whole lot more confidence with credit. worry at the start of the year. people said, they have got

religion, got the policy levers they can call, defend their credit rating. given the nature of this shock we are experiencing, yet the companies they can defend those credit ratings? >> i think the majority of tripoli companies are probably pretty secure for a short time. the virus issues we are saying, if that is the true cause of the spread widening, if that is the main cause of all of this volatility, perhaps they can make it through that on a temporary basis. there will be issues -- if goldman is correct and profits are zero, then i think you start to have more issues. you'll have more these d triple names and into junk-bond status. that will cause the quiddity issues. that will have them need to be removed from funds. i think we have to wait a little bit longer. i'm not ready to say triple d's are in trouble at this time. it will be more of a case-by-case basis, especially energy names because their leverage is so high. it makes up a huge component of

the stock market. let's watch it in that sector. jonathan: with the equity market on the screen right now, all over the place. down 3%, 4%, then positive, then down again. -- what happens with the balance sheet for some of these companies if profit growth is zero through 2020? what is it mean for some of those bullish narratives around some of those credits in high-yield come in trouble b and elsewhere? >> if there's no profit growth all your, that falls apart from many forms. we are two months in. that is a lot of time yet with zero earnings. i think it is a little premature to call that. and 2016,out 2015 energy companies crack. defaults went way up. in our view, that is the cause for big credit meltdown. until you get the falls are likely to go up and go up soon, it is pretty tough to sustain much wider spreads. jonathan: when we had some

credit spread widening cause some severe credit spread widening relative to last year, last december, december 18, i think you can make the argument the fed was tight. i think you'll struggle to make the argument that the fed is tight on you. you make the argument right now it is too tight? >> i think it is pretty hard to make that case right now. in addition to the policy measures on the fungicide come it is done a lot with respect to qe. now balance sheet growth going on probably until at least june or longer. the fed is obviously involved in repo trying to keep that stabilize. in addition to the more basic fed funds aspect, it is analogic try to keep liquidity going. jonathan: we have to talk about the data. the guys around the table will be sticking with us. coming out, the final spread. weekend featuring the payrolls report. yes, really. that is just around the corner. a preview coming up next. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." . big data points coming tonight and over the we can we get china pmi's. on monday, the u.s. reporting. americans hitting the polls on super tuesday. then ending the week with u.s. payrolls report. back with this, subadra rajappa, mike schumacher, and victoria fernandez. the estimates out there are absolutely amazing. the consensus view in and around 45 on a pmi manufacturing. the highest estimate is 50.1. the lowest, 30.0. how on earth am i to interpret the data that comes out from china little bit later? >> i don't think we are, jonathan. it is all over the place. there is so much uncertainty as

to how things actually are going to play out in china right now. how did the manufacturing really come through in january and february after the coronavirus hit? how are the workers truly affected? how are those numbers going to be affected by that? we just don't know at this point in time. i think you have to take january/february numbers with a grain of salt. look through those numbers and i think we're going to have to do it here in the u.s. as well because some of that fee through from the supply chains is going to affect us. we're really not going to get true numbers into the middle of march i think coming out of china that will give us a better idea of what is truly happening on the manufacturing side. jonathan: how are they going to respond to it? that is what i'm interested in anything near 50, i think there will be this attitude of, we don't believe it. if it comes in really soft, we believe it is not good. is it going to be negative in terms of the attitude for the data? >> think of it is close to 50, that will be externally hard

regardless of what happens. to me, this is just the beginning of the bad data that we potentially will likely see over the next couple of months or even longer, like you mentioned earlier. the sentiment has clearly changed from a v-shaped to a u-shaped. this could easily be the beginning of a series of bad data we get from china as well as everywhere else. jonathan: mike schumacher? how do you think we will interpret that data? >> i like your point, asymmetry. 50, not credible. 30, probably worse than reported. jonathan: do you think the attitude will be the same for the ism? >> looking at the u.s. perspective, at least a little bit of a view in terms of supply chain disruptions. market responses, probably number three or four in terms of data points. probably should get more weight than people give to it. jonathan: that was the inflation point last friday when we got the services emi that came in

soft and i think i shut the confidence some people have that the u.s. would be resilient to a lot of what is happening in the global economy. what are you looking for in the ism next weekend payroll next friday? >> we think we will continue to get decent numbers coming in. ism potentially trough to in september. we are looking for those numbers to move a little bit higher. i think we are going to have some feedthrough from coronavirus and the manufacturing and supply chain issues in china, but would not be surprised as he does manufacturing numbers come down a little bit. we don't want to see the services number continue to fall. jonathan: rapidfire round with three quick questions and answers. does thet question, fed move in march, yes or no? >> no. >> no. >> note. jonathan: you don't think the fed is going to move and march? amazing. have we seen the highs for the

10-year you -- yield for the year? >> no. >> yes. >> yes. jonathan: u.s.-german ten-year spread has been in and around 170, 180 basis points. do you think we can break 100 by end of year? >> no. >> no. >> note for me as well. jonathan: great to catch up with you guys. thank you. from new york, i will see you same time, same place next week. this was "bloomberg real yield." this is bloomberg tv. ♪

mark: i'm mark crumpton with bloomberg first word news. a deepening health crisis is also becoming an economic one. the coronavirus outbreak is having financial markets, and

thing shops and businesses and putting major sites and events off-limits. there are confirmed cases in nearly 60 countries. more than 83,000 people around the world have been infected. 2800 have died. house official is an knowledge in the coronavirus is likely to cause disruptions to everyday life in the united states. >> are you going to see some schools shut down? probably. may you see impacts on public transportation? sure. but we know how to handle this. commentsvaney made the outside washington, d.c. today. the trump administration cannot make central american immigrants wait out the results of their asylum applications to the u.s. and mexico. court in saneals francisco today upheld the judge's order barring the policy which prevents immigrants from living in the u.s.