jonathan: from new york city for our audience worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, treasuries heading deeper into uncharted territory. credit funds suffering the biggest weekly outflows in years with crude markets plunging into the low 40's. we begin with the big issue, treasuries surging. >> just when you think treasury yields cannot go lower. >> lower. >> lower. >> they continue to do so. >> yields at record lows when the fed cut. >> global bond yields at historic lows. >> record low treasury yields. >> they have gone to further record lows. >> this has been such an

exceptional move. >> not a good sign. >> everyone is kind of getting out of its way. >> the bond market seems to be concerned about a recession. >> the bond market is telling you it is a very dark outlook. >> it's not just about growth, it's about potential qe, potentially lower forward guidance. >> whether that is the right plan or not, they are going to zero. >> the u.s., unfortunately, will be dragged down more toward europe. >> the rates market has another 25 basis points it could go. >> there are so many assumptions that are being repriced now. >> be careful out there. jonathan: joining me around the table is george rusnak, oksana aronov, and gershon distenfeld. oksana, let's begin with you. remember the payrolls report? oksana: vaguely. jonathan: do you remember the rate cut earlier this week? how long has this week been? oksana: one of the longest but also one of the most exciting. if you were coming into this with a lot of dry powder, as we are, this is like christmas morning, although we are just getting warmed up.

we have been getting a lot of questions about, is this the time to add risk? i'm sure we'll talk more about this. in terms of the jobs report, it seems irrelevant now, but it is great to know he had a healthy patient coming into this. we don't know how transitory this will be, whether this is that black swan being thrown around. it is good to know the economy is on solid footing. jonathan: you were the first person that has sat around this table with me and described any of this price action as something like christmas morning. gershon, i don't know if you share that sentiment. gershon: i am kind of worried. i've been doing this for 23 years, and this is the first time where nobody cared about the jobs report. i am a glass half-full type of guy, i'm usually a buyer of dips. a value type of investor. i am particularly worried. this is not a normal type of crisis. this is not where you would see growth slow down a little bit. there is a real chance economic

activity comes to a halt. if people stop traveling, congregating, you will not want to see the next set of numbers. typical monetary policy does not work in this type of environment. you will need a huge step up on the fiscal side, and even that may not be enough. that could be very worrisome for asset prices. george: i agree with that. but i think there is another side of this that will come out. but you are right, there are supply-side disruptions, event disruptions going on, demand disruptions, and all of that will lead to revenue and growth disruptions. it will be longer than people think. our view is it potentially leaks into q3, and we are going into it strong and you come out of it stronger. but it will be a bumpy ride. jonathan: i want to talk about the treasury market. we got this monster bid of 25 basis points lower on the 30-year. it is a single session. what are we pricing in here?

the pace of this move has been stunning. two-year yields, two mondays ago, basically where the 30-year is now. the two year yield is no infraction of where was two weeks ago. what do you make of the pace? what are we modeling? gershon: i think we've been setting ourselves up for this. one thing we noticed in the marketplace before this, going on for about six weeks, on days when equity markets were up, duration was not doing much. when it went the other way, equity markets selling off, duration was rallying. even though we were in the 130-170 band on the 10 year. that was not a good sign for markets. markets are telling you, treasury markets are telling you a clear thing. whether we are heading for recession or a prolonged period of weak global growth, it is worrisome. it is certainly telling you that we will see a lot more easing, stimulus coming. oksana: i think it also raises an existential question for fixed income management industry, or the long only part of that industry.

we are cratering toward zero. it looks like we will get there. at least right now, it looks like we will get more cuts. what happens from there? the age-old formula of taking a core portfolio and sprinkling it with products and zigs and zags, that does not really work so much anymore. if you look at the monster move we have had in the u.s., that is protected fairly ok in the move in equities. but in europe, you have not had a monster move because those rates have nowhere to go. going forward, traditional fixed income management has to really do some soul-searching in terms of what is going to be our value add here? george: we all have long careers here. one of the challenges we face is rates backing off quickly, losing value. that was not as big of a problem because you had a good value edge going forward. when rates go down toward zero, it becomes more challenging.

gershon: your point is spot on. the odds of us going negative -- never say never -- but it is much lower in the u.s. versus europe. there is only so much more we can rally. what is going to be that safety asset? i do also think -- let's not all be totally negative. there was a piece of good news. we don't want to be overly political, but what happened in the democratic primary this week is very important for markets. the market did react that way after wednesday. wednesday morning. that is significant, the fact that the betting markets now have bernie sanders at less of a 10% chance to get the nomination. that was weighing on markets. it was looking like he would run away with it a week ago. that has abruptly changed. that is very important. jonathan: what does that mean for treasury markets more specifically, never mind risk? i want to get my hands around what that means for treasury. gershon: i don't know what it

means for treasury markets. we were talking before the show -- i was joking. in some respects, bernie sanders' plan, if you want to spend $60 trillion, if you can borrow at 1.3% over 30 years, 100 years, who knows how long, if nominal growth will not be 1.3% over the next 50 years, we will have big-time problems. i'm not sure what it means. jonathan: it's been simple to construct the argument on why yields should go higher. yields keep on going lower. one thing i find fascinating, i remember bob michele was here a year ago, and he said 10 year yields in germany, the u.s., and japan have been anchored by the policy rate. not what you typically expect. it is not happening at the front end but further down the curve. you look at where 10's are right now, basically where the fed funds will be by the end of the month. look at germany. basically by the depot rate for the ecb. japan, zero, same as the policy rate. i'm trying to understand whether these central banks can engineer

to beat the curve anymore. the way the market response to cuts is to pull the whole curve lower. is that the story now, is that what we have to get used to? oksana: one of the things this is exposing is that central banks do not have the efficacy that they used to have once upon a time, and don't have control of the situation. look at powell on tuesday, $120 billion of stimulus, 50 basis points cuts, watching the dow go down by 800 points. watching yields greater below one on the 10 year. there is very little they can do here. yes, you are going to need more diverse bonds from the fiscal side. gershon: i don't have much to add to that. they lost control. the question now is what is going to be more effective? if this starts to get out of control, becomes a supply issue, not demand issue, it will make the market happy for about five minutes, as it did earlier this week.

that is not going to solve anything. do they go more unconventional policy, maybe signaling that they will be slow to raise rates on the other side of this? actually may be more important to markets than cutting further. jonathan: what do you need to see from policymakers, outside of central bankers, to restore confidence to this market? this is the conversation i was having with larry kudlow earlier today. it seems to me they are being so reactive, held hostage to markets. the threshold to do more is if the s&p gets lower. as much as i say that tongue-in-cheek, it is worrying. i would rather have these policymakers lay out a set of tools and say if a downside risk materializes, we have this ready to go, this ready to go. if they did more of that, would you be more confident? george: i would be. he alluded to the idea that he might start doing that next week. we are talking about something that happens over maybe three,

six months. how do you get through that timeframe? do you have small business loans, targeted policies that help businesses out in the short-term? we think that probably comes around next week. we would have liked to have it this week, but what we got from the fed was not what the market wanted to hear. it was too fast, too much, and frankly, unbalanced. the idea of, they have action and guidance. they came up with the action of 50 basis points, which i would argue was too much. the guidance, instead of balancing that off, doubled down on that, and that spooked the market. jonathan: if you told me 12 months ago that the market would be unhappy with a 50 basis point cut, i would not have believed you. that's where we are at right now. coming up, we take you to the auction block. that conversation is next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block. kick things off in europe, the coronavirus started and ended the week with sessions of sales. european grade issuance falling behind 2019 the first time this year. in the u.s., the second busiest day for high-grade debt sales. immediately followed by borrowers giving concessions newly five times the years average. the high-yield primary market grinding to a slow halt. bounce house becoming the latest company to fall by the wayside, withdrawing plans for its $5 billion sale. michael collins saying he is looking for opportunities to buy. >> just now we are going to this capitulation phase, the buy the dip mentality has faded for the time being. we are excited about that. we are looking for opportunities where people are forced sellers,

dumping blocks of bonds that we liked five points lower, and that is when you are supposed to be jumping in and buying. jonathan: back with us are george rusnak, oksana aronov, gershon distenfeld. here is your moment, oksana. you said it was like christmas morning. oksana: very early in the day. the presents are not quite out yet. if you think about high-yield, it is just inching its way into the 500 spread. if you take energy out of that, which is where most of the stress is, high-yield is still around 5%. 50% of the high-yield market is bb, and that is helped by the duration play. they have held up ok. high-yield went negative on the year just yesterday. down barely half a percent. that is the market entirely if you take energy out of that. you have to wait. probably for another couple hundred basis points. energy will lead the default cycle. for them, no matter what the fed

does, it is not a liquidity problem but a solvency problem. $47 oil will not cut it. we are going to go through another cycle there. high-yield will be affected and there will be an opportunity. jonathan: it is christmas day but i have to wait another 200 basis points? that sounds like july. oksana: depends on how fast we get there. high yield has not reacted the way equities has. that is typical. high yield lags what equities do. jonathan: gershon, this is your world. you live and breathe it, usually constructive. never an alarmist. you are always constructive and always sensible. where are you at right now? gershon: i will not call myself an alarmist, but two things to pay attention to. we have to get back to the old debate of relative versus absolute, and that comes to spreads versus yields. spreads look more attractive, but yields generate returns. you have to be looking at what

you buy in the market. take energy out, take out the dicier ccc's, and all of a sudden you are left with 4%. that's not the most attractive thing in the world. the second thing, this is the type of crisis that increases the debt tail. you are not so much worried about the growth slowing, you are worried about the bottom pulling out, things grinding to a halt. jonathan: end of cycle dynamics? gershon: end of cycle dynamics would be typical end of cycle. you will start to see slowing growth, maybe a minor type of recession type of thing. we are talking about -- there is a real possibility -- all of us talking before the show, the potential for schools to close, businesses to close. we all work from home for a while and don't travel. economic activity slows to a halt for some period of time. that means we -- we saw the chinese pmi numbers. that could be what the global economy looks like. it may be a very short period of time -- i don't mean to sound

alarmist. i guess it is a little alarmist. the point is, we would have a huge recovery. but that is not a great environment for credit. as long as a company is ok, equity valuations can recover overtime. for companies on the precipice, with a lot of leverage, that are cyclical, that could be problematic. just like the consumer who may miss their mortgage payment. that's why you need fiscal to step in. jonathan: you are talking about getting paid. the company needs to pay the money. you are worried we are approaching a moment where perhaps we get into some real issues? gershon: as we talk late in the cycle, i have been critical of just saying cycles all the time, but there has been leverage put on the balance sheets of companies that are on the cusp. if we go through a month or two of people not spending money, seeing incredibly weak cash flow, that could be a liquidity issue. jonathan: what sectors are you worried about right now?

i don't expect names. the airline sector is out there now. gershon: it is not so much sector, but a sector that has been more cyclical in nature would be at the top of the list. just a leverage profile relying on continued cash flow. george: to your point, defaults are picking up. if you look through february, it is on the second highest level ever. it is february, but you are seeing defaults pick up, and flows are backing down. if we get funding pressures, that is where the problems start. that is where things exacerbate. if these companies don't have access to liquidity within the marketplace, that is when things start picking up and exacerbating. from a sector perspective, you are right, it is focused on the energy market, but look at where you have supply disruptions. that could move into other sectors. certainly could go to retail, technology. once you see funding pressures spilling into other sectors, that is the opportunity. it is not christmas day yet, but approaching. gershon: i want to be clear, i'm

not advocating hiding under the desk. in our portfolios, we are not just selling stuff and taking the risk out. all i'm saying is don't think this is a tremendous buying opportunity. i am just say keep some dry powder. i'm not saying even a base case that we will have a huge selloff. this is less tail out there, and you should not be going all in at this point. oksana: yes, energy may lead in terms of defaults, but as we have seen before, once technicals get going, you get that recessionary pricing, irrespective of whether you have a recession in the sector. flows are coming out of etf's right now, coming out of the entire etf and not any sector. jonathan: coming up, the week ahead, including a rate decision from christine lagarde and the ecb. that conversation is around the corner. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. over the next week, politics coming back into focus with the next round of the democratic primary elections. plus, a slew of economic data including cpi, ppi numbers from china and the united states. finally, an ecb rate decision followed by a news conference with president christine lagarde. with me around the table is george rusnak, oksana aronov, gershon distenfeld. let's talk about the ecb. the fed is making a move. the meeting is coming up in a couple weeks time. what do you expect to see from the governing council of the ecb? oksana: an entire 10-basis point cut is coming. jonathan: that's what you would like to see or what you expect? oksana: that is what they will put on the table. i was joking before we went on the air. "honey, rebook the cruise," said no one ever on the back of a central bank cut. that will not do much of anything. what we really need is,

facilities need to be put in place to deal with a potentially escalating number of bad loans. are they equipped to do it, prepared to do it? has christine lagarde had the opportunity to do the review she needed to do to think about all the different moving parts with our counsel? not likely. george: she is in a tough spot. the market expects her to cut by 10 basis points. to your point, i don't think it will help much. what do you do beyond that? do you extend qe, make that even bigger? i am not sure that will help. jonathan: is there a circuit breaker for you, gershon? something a policy maker could do that would get you to sit up and say "game changer?" gershon: we were talking before, some leadership away from monetary policy. clearly monetary policy is not where the game would be. maybe some leadership in what has to be done on the fiscal side. i hate to say this, but a little trump-like, demand that people out of your control do

something. there is only so much she can do. you have to demand something be done on the fiscal side. jonathan: does that need to be in size or targeted, or smart and specific? or just go in with size? gershon: size is what markets want to see, makes a nice headline. targeted and smart will be what is most effective. george: the market would love either, to be honest. big size, they love targeted. i think targeted is the smart way to do it. it is a short period of time that you just want to get through. jonathan: if you want a call option on the second half recovery -- let's say you are super constructive right now and you think, going to buy lottery tickets, second half, things will be better. what would you do right now? gershon: what action would i take right now? forward guidance. jonathan: from an investment perspective. what would you do? if you think the second half will be better, some people looking to take a call option on that, what part of the market would you go to? where are you going to get that outperformance? would you buy inflation

protection? where would you go? gershon: i would probably short duration, if i thought about it. if you really thought that this was going to be a hiccup, you are going to get a positive surprise, these levels don't make any sense. oksana: absolutely. the ferocity with which we got here will be somewhat similar on the way back, if this ends up being a blip. i don't think that is anyone's base case scenario right now. but the gains can be taken as quickly away. jonathan: let's get to the rapidfire round. three quick questions. can the 30-year yield break 1% before the end of q2? gershon: it would be crazy to say anything other than yes. george: yes. oksana: yes. jonathan: high-yield spreads, in and around basis points. what do we hit first, 350 or 650? oksana: 650.

gershon: 650. george: 650. jonathan: fed meeting, 25 basis points, 50 basis points, or nothing? oksana: 50 basis points. george: the policy is 25 but i think they will do 50. gershon: model in my head average, 41.37. jonathan: very specific. great to catch up with you all. thanks to george rusnak, oksana aronov, gershon distenfeld. from new york, that does it for us. see you next friday, 1:00 p.m. new york time. this was "bloomberg real yield." this is bloomberg tv. ♪

carol: welcome to "bloomberg businessweek." carol: i'm carol massar. jason: i'm jason kelley. we're in new york city. carol: the coronavirus spreads and investors try to decide if government efforts and its economic impact. jason: barnes & noble's next chapter. the new