forthan: from new york city our audience worldwide, i am jonathan ferro. "bloomberg real yield" starts right now. coming up, 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. no signs central banks are ready to step in. >> what is the fed going to do? >> the fed is divided. >> they really want to take a wait and see approach. >> the fed is behind the curve. >> coming into the year, they thought they would be comfortably on hold.

i think that is still what they want. itthe marking is doing what wants -- the market is testing the fed's resolve. >> markets like to see the central banks step in. >> the case is strong for them to step in. >> they want the fed to cut. >> i don't the fed will cut. >> they should be cutting. >> i don't think the fed should cut. >> monetary policy is prepared to act, but will it be effective? >> the effectiveness would be tremendous. >> interest rates are not vaccines. >> we would see a little bit of turnaround in the markets. >> the fed is fairly impotent in this environment. >> on the other hand, if they do nothing, it could make the situation worse. jonathan: joining me around the in new york, subadra , mike of societe generale schumacher of wells fargo, and, in houston, cross mark's victoria fernandez. victoria, i want to begin with you. 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.

where are they? victoria: 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. and i don't think we will see it from the fed. a lot of people wanted to have powell come out today 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 do think they are a little more on the wait and see at this point in time. jonathan: that seems to be the case. richard clarida saying nothing. christine lagarde pretty much saying nothing. the central bank in south korea, at the epicenter of this, does not cut interest rates. what do you think is holding them back? subadra: i am sympathetic to their position. they are in a very tough spot. this is a classic supply-side shock. it is hard to justify that monetary policy will really move the needle when it comes to providing stimulus. but the market is already pricing in for cuts. the one metric we track closely

is the first fed funds contract. that has inverted. typically, any time it inverts beyond, say, 25 basis points, the fed has followed through and delivered a rate cut. now, that curve is a close to -50 basis points. it is almost certain that the fed might have to act, because, in the last three decades, any time that part of the curve has inverted, the fed has followed through and cut rates. jonathan: let's put it couple of these things together. when it comes to the efficacy, which you have touched on, do you think that is what is holding them back? the nature of the shock is not something monetary policy is traditionally good at arresting. is that part of it? michael: that is one big part of this. i think the other thing, too, they're not sure about the progression of the disease. you can see it is spreading, but but how badly will it get and how quickly? they don't know. we don't know. and i suspect a lot of the public health officials are just making educated guesses. in that backdrop, 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. the front and yield is coming down 12 basis points. victoria, it is interesting to me. we have not seen a central bank official at the fed suggest we are going to rate cut anytime soon. then the market bids down the front end 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? victoria: you know, the market has been driving a lot of 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. and the market has their own reaction and ends up pushing the fed into a corner to do something. it appears the market is doing that now. as your guests were saying, we are pricing in, what, three fed cuts already this year? just in the last week? those possibilities have skyrocketed. they are trying to push the

fed's hand. i don't think the fed wants to jump into that because of the efficacy we were just talking about. people are not sitting at home saying, if rates were just 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 that, at this point in time, it would probably not make a huge difference on a fundamental side. where it would make a difference is on the sentiment side, and they have to weigh if that something they want to step in on at this point in time, which would be temporary. jonathan: a big part of this has been a loss of faith in the policymaker to, one, contain the virus, and two, upset it. with all of that in mind, we have to think about where monetary policy is going to go. 12 months ago, they were able to step in and do three things. stop hiking, stop cutting, lower the policy path, and then shift the reaction. what options are available to them right now? subadra: i think this is not fundamentally a problem that can be dealt properly with policy. that said, i worry about the counterfactual. which is if they do not come in

-- let's enter the march meeting, and they don't cut rates, and they have extraordinarily negative reaction in risk sentiment as well as a correction in the markets, at some point, they're going to have to react. so why not be preemptive and cut rates and provide that stability, which is what the markets are really asking for. jonathan: the issue, though, and you have touched on it, 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 if they think fed rates would be cut in march. they pretty much all said no. a week later, we have gone from the happy talk of a v-shaped recovery to some people, increasingly relative to last , week pricing in a technical recession, not for china, but here in the united states of america. do you think the narrative has gone from complacency to overkill, to the other side? michael: 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. so 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 to make that claim. jonathan: looking at the front end of the curve, we have seen it steepen. at about 23 basis points. is that a direction of travel for you at the beginning of a long-term bull steepener? because the fed has to come in? is that how you think of the curve and the shape of it in the coming months? victoria: we always want to consider the shape of the curve is, how they are reacting, whether we are getting a bull steepener or a bear steepener. right now, though, because i think so much of it this is being driven by a fear component, a sentiment component that is there, it 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.

and so i think you have to be very cautious when you are looking at the yield curve right now. yes, you can use it as an indication of sentiment at this point in time, but the fundamentals are much stronger than what that is showing us. i think you have to focus a little bit 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: that is the difficulty, though. how do you focus on the fundamentals? no one can model 2020 now. 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's no conviction to do a whole lot other than buy a treasury and hide under a rock. what is a circuit breaker you need to see to change that story? subadra: well, 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, the growth is already slowing down to recessionary levels. so this is just going to push them over the edge, and this could potentially lead to a global recessionary environment. michael: in terms of indicators, you probably want to see some evidence the virus has slowed a bit or perhaps if there is even hint of a vaccine in the offering, 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 people have sat here and said we are down in the efficacy of central banks and the ability to step in. if they did step in -- and i'm not ready to have a judgment on what they did step in -- but do you think that could be the circuit breaker for this market? if chairman powell says, it is going to be ok, we will do the right things. yes, downside increase have increased, but we will be there to lengthen the cycle and to do whatever it takes, would that be enough? michael: it would probably help

quite a bit. i suspect if the affected come in, it would be big. why not go 25? why not go 50? if we have this move that would be fickle to explain anyway -- and we all agree that 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? remains to be seen. i suspect it would help a bit. jonathan: they will stick with me. coming up, the auction block, global debt markets grinding to a halt. that conversation coming up next. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." i would like to head to the

auction block and kicked rings off over 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 its second zero issuance day of the week. over in the u.s., debt offering totally drying up, the investment grade primary market heading for its first week without a single sale since july of 2018. and mining company cleveland cliffs the soul high-yield issue, testing markets this week offering a $950 million junk-bond to its plan ned acquisition of ak steel. sticking with it charles schwab , with a warning. >> 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. so our conviction is probably have a ways to go before this

has played itself out. jonathan: back with subadra rajappa, mike schumacher, and victoria fernandez. it was the story in 2018 when the primary market seized up and the fed said we have 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? victoria: i think it is one of the things they are watching. obviously, liquidity in the markets is extremely important. and if that liquidity starts to dry up, then yes, the fed will step up and do something. not just the fed. central bank around the world will step up and do something. 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 are actually just getting back around to the historical averages, because we have been so extremely tight. if we continue to see it move, although it has been done in a small timeframe, if we continue to see them move wider, then perhaps it becomes more of an issue.

right now, i think it is just like everything else that the fed is doing. they are just watching and waiting and seeing if it starts to return to prior levels before the coronavirus. jonathan: how would you frame things right now mike? ,just leaning on what victoria just said. really quite quickly. is it the nature and speed of the move that they will be uncomfortable with or will it be the level they look at and say we are still comfortable with this? michael: probably the speed more than level. already met wells fargo has been negative on high-yield for a while -- same basic argument, probably more of the speed. 130, 140 basis points quickly is somewhat scary. i doubt that alone will disconcert the fed too much. jonathan: the last time we had both a growth shock and an oil shock, high-yield spreads were around 900. there were north of 800. a completely different world. do you see the parallels at all between what we are experiencing right now and the growth scare of, say, 2016 where high-yield really fell out of bed?

subadra: well, i think 2016 was you need, because he had this very sharp correction in oil price. oil prices got down to $25. it was this global growth stability type situation, demand destruction. we are not there yet. oil prices are still holding up, for the most part. and also, this time around, the thing that is different between spreads widening this time versus last year is that, as treasury yields are rallying, the magnitude of the widening has been a lot more this year relative to last year. last year, we saw some widening of high-yield 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 there are certain sectors that these markets that are going to come under pressure needing to default as conditions deteriorate. jonathan: let's talk about that. i think it is important. last year, there was a whole lot more confidence with credit. a worry at the start of the year. as the year grew older people

, said, they have got religion, they've got the policy levers they can pull, they can defend their credit rating. given the nature of this shock we are experiencing right now, can they can defend those credit ratings? victoria: i think the majority of bbb 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. i mean, if goldman are correct and profits are zero this year, then i think you start to have more issues. you'll have more of these bbb names fall into junk-bond status, that will cause liquidity issues. that will have them need to be removed from funds. so i think we have to wait a little bit longer. i'm not ready to say that bbb's are in trouble at this time. it will be more of a case-by-case basis. especially energy names, though, because their leverage is so high, it makes up a huge

component of the stock market. let's watch it in that sector. jonathan: that is a trouble we have right now. with the equity market on the screen right now, all over the place. down 3%, 4%, then positive, then down again. for the credit market, looking at the fundamentals through 2020, am i going to get paid? what happens with the balance sheet for some of these companies if, to victoria's point, profit growth is zero through 2020? what does it mean for some of those bullish narratives around some of those credits in high-yield, bbb, investment grade, and elsewhere? michael: if there's no profit growth all year, that falls apart from any investment firms. we are two months in. that is a lot of time yet with zero earnings. so i think it is a little premature to call that. subadra made a good point about 2015 and 2016, energy complex cracked. defaults went way up. in our view, that is the cause for big credit meltdown. so until you get the belief that defaults are likely to go up and go up soon, it is pretty tough to sustain much wider spreads. jonathan: just to go full circle, the other issue as well, when we had some credit spread

widening, some severe credit spread widening relative to last year, last december, december 18, i think you can make that the argument the fed was tight. i think you'll struggle to make the argument that the fed is tight. can you make the argument right now that the fed is too tight? michael: i think it is pretty hard to make that case right now. in addition to the policy measures on the funds side, it has done a lot with respect to qe. now you have balance sheet growth going on probably until at least june or longer. the fed is obviously involved in repo trying to keep that stabilized. so in addition to the more basic fed funds aspect, it is doing a lot to try to keep liquidity going. jonathan: we have to talk about the data. the guys around the table will be sticking with us. victoria as well. coming up, the final spread. the week ahead 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." it's time for the final spread. coming up over the next week, the big data points coming tonight and over the weekend. we get china pmi's. on monday, the u.s. reporting its own pmi's and anti-fracturing data. 24 hours later, americans hitting the polls on super tuesday. and then ending the week with the u.s. payrolls report. back with us, subadra rajappa, mike schumacher, and victoria fernandez. victoria, i want to talk about chinese data. because the estimates out there at the moment 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 meant to interpret the data that comes out from china a little bit later? victoria: i don't think we are, jonathan. you are right. it is all over the place. i think that is just because 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 little bit 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 feedthrough from the supply chains is going to affect that. 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: what is the data going to be, point one. two, how are investors 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. and if it comes in really soft, we believe it is not good. is it going to be a really negative bias in terms of the attitude for the data? subadra: i think if it is close to 50, that will be externally

-- extraordinarily positive, 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 recovery to a u-shaped recovery. so this could easily be the beginning of a series of bad data we get from china as well as everywhere else in the world. jonathan: mike schumacher? how do you think we will interpret that data? michael: i like your point, jonathan. there is an asymmetry there. 50, not credible. 32, bad. and it is probably worse than reported. the markets are probably looking for a down. jonathan: do you think the attitude will be the same for the ism? michael: i think it is interesting. and looking at the u.s. perspective, you get at least a little bit of a view in terms of supply chain disruptions. we look at market responses to ism, we think it is probably number three or four in terms of data points. but probably should get more weight than people give to it. jonathan: to me, that was the inflection point. last friday, when we got the

services pmi and that came in soft, and i think that shook the confidence some people have that the u.s. and in the global economy. what are you looking for in the ism next week and payroll next friday? victoria: we think we will continue to get decent numbers coming in. ism potentially troughed back in september. we are looking for those numbers to move a little bit higher. but like i mentioned, i think we are going to have some feedthrough from coronavirus and the manufacturing and supply chain issues in china, so i would not be surprised to see those manufacturing numbers come down a little bit. but we don't want to see the services number continue to fall. jonathan: let's rattle through the rapidfire round and get three quick questions and answers. your first question, i asked last week i got pushed back. i will not get much pushback this time around. does the fed move in march, yes or no? subadra: no. michael: no. victoria: no. jonathan: you don't think the fed is going to move in march? michael: not quite yet. jonathan: amazing. have we seen the highs for the 10 year yield for the year?

yes or no. the high in or around 192. have we seen the highs for the 10 year yield for the year? yes or no. victoria: no. subadra: yes. michael: yes. jonathan: final question. u.s.-german ten-year spread has been in and around 170, 180 basis points. do you think we can break 100 by year-end? yes or no? michael: no. subadra: no. victoria: no 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. for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪

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