Is this a couple of isolated cases or the start of something broader . Right now it still seems more isolated. Clearly the tax package will create winners and losers. Tax reform has to happen. If it doesnt happen, it gets ugly. Stock markets get ugly. Everything gets ugly very fast. It is no longer agreement for a green light, for credit markets. It is more yellow. There are still some companies with decent fundamentals but there is a lot of sectors or more sectors under pressure. Youre not getting paid an awful lot. As an investor you have to be careful. Buying quality. These days when the markets rollover it feels volatility needs to rise. Maybe that is what we are seeing. My concern is what if the market goes to 260 . That could be interesting. That is a genuine competitor to the credit market. That is where i think the bleed could be more systemic. The 800 pound gorilla is whether or not this build up of a corporate leverage which we have seen over the past few years is sustainable or does it lead to something less benign . Jonathan we have a full house in new york city today. Joining me is henry peabody, Subadra Rajappa, and ashok bhatia. Ashok, the situation in credit. We have seen this movie twice already this year. In the spring, again in august, and now as we approach the december and end of the year, will we see what we saw earlier in the year . We rollover than roll back up again . Ashok i think this one is a little different. Best guess is credit spreads are probably in for the year. There are two things a little different about this selloff. There are some fundamental deterioration, whether it is in some of the telecom names, retail names, pharmaceutical names. Ig, high yield. There are some real disappointments. It will be hard to rerate these credits nearterm. The second thing is, were seeing a house and senate bill with tax reform. These are creating winners and losers. Some of the losers will be in things as varied as hospital bonds in the Municipal Market potentially, to cruise ship securities. We are starting to figure that out. As we focus on the winners and losers it will be something a little bit of an overhang. Jonathan henry, the same thing. It started out as a stock specific story. Then at bleeds through the sectors. Sprint, the deal collapses. Then it goes into the telecoms and it spreads in the health care. Those were the leading declining sectors. Is it sectorspecific for you . Does this become an asset class problem . Henry i completely agree. There are some sector specific and some fundamental concerns. But from a valuation standpoint, and that is the starting point of this, i think some of the concern really is that we went into a negative correlation story between equities and rates, and pile in the low volatility. As you start to get a whiff that equities are going to selloff with rates, it becomes of a question of our models and how we think about credit and risk and rates. That is what has happened. Do we have a larger unwind . It is very possible, from some pretty stretched valuations. Jonathan did you see the valuation problem . Subadra this is an intended consequence of quantitative easing. In an environment where yields are low, investors go out further and further to get returns. What happens is over time you start having this risk buildup in the system. The question is about risk versus reward. In a very simple terms. To me, i feel like we might be at a Tipping Point where the risks might outweigh the rewards. Jonathan we have been talking about that for a long time. I could ask any guest around the table, are you being compensated for the risk you are assuming in the market . They would say no, but there is no alternative. You could pick out the tesla bond issue in august and you can , say to people is that priced properly . They say no but they bought it anyway. Why is it different now . Ashok take a little bit of a step back. We are in a positive, synchronized growth environment. It is hard to see that changing. That is support for credit. Spreads may be tight. We may have a blip. We may be have seen the tights nearterm. Does that mean we are about to have a 2008 experience . We dont think so. We think this will be more of range of trading. The drivers of a big default cycle in u. S. Credit, they are not there right now. Jonathan something you said. The economy is doing well. I wonder if the credit is somewhat divorced from the economy anyway given the way the rest of the market has been trading while the economy is recovering. Look at what has happened in europe. We were incredibly tight before this year, before the data got better. We had a guest this week that said the taxes come through, as the economy gets better, as treasury yields back up, you will not have a Good Environment for credit. Maybe the opposite. What do you say . Ashok it is a question of degree. Say we have a 30basis point in treasury yield and a widening of credit and were sitting with the same u. S. Growth environment, which is a reasonable hypothesis. We think we will see foreign demand. One of the big stories in credit has been the demand from japan, from overseas, from asia. Our sense is that client base would view that as a backup and an interesting place to invest. Assuming the economy is level, which is our guess. Jonathan you see that support coming in as well . Henry one of the things to think about is the mammoth flow into passive and indexbased products. That is providing support for the teslas and netflixs of the world. They come at pricing levels. The question becomes, what happens when there is call on liquidity in the broad market . We see it extending into private credit and private equity. That call on liquidity will be the public markets. What happens then . We need to be cognizant of the risk of those brought markets. Of those broad markets. Jonathan have you seen any of that this week . Any evidence of selling of things that are the most liquid and things you cant sell . Henry that is what we have not been seeing. It is fundamentaldriven. Watch for the cracks to spread into a more broadbased call on liquidity. So far it has not happened, but that is how these things get started. They dont start in the most obvious of fashions. You can never see the catalyst for a negative move ahead of time and pinpoint it. It is when you least expect it. Right now, there is a great deal of positive news. Your point about the economy as is well taken, but what about saudi arabia . What about the risks in the middle east . There is a lot of risk in the market right now. We are not compensated for it. Jonathan something that struck me this week that i thought was different and it happened in thursdays session, equities soft, credit soft. German bund yields higher. Did you figure out what was happening . Subadra it comes to the Central Banks and communication. You had a very dovish ecb come out a few weeks ago at the meeting. The market overreacted. You saw a rally after the announcement of a tapering of assets. You had an official saying that the markets are very complacent. Low and behold, you start to see the selloff in bunds. Now we have an environment where the European Union is having its best growth in almost 20 years. It feels in that environment that bund yields are very low and they have to be repriced higher. Jonathan do you see more risk in highyield or more risk in the suppose it riskfree asset like treasuries . Ashok i will pivot quickly. We see risk focused in certain id sectors, focused in Interest Rate sensitive double b highyield segments. You dont want to over exaggerate these risks. The issue with the sovereign bonds issue is you have japan thinning 10year bonds at zero. European at negative. Those are two big gravitational pulls. Can we get to 270 . Absolutely. Is it a bigger story than that . We dont see that right now. Jonathan everyone sticking with me. Henry peabody, Subadra Rajappa and ashok bhatia. Coming up, the Auction Block. Last week, tim cook opened the doors for the sale of the iphone x. This week, he was selling off bonds. Highgrade issuers shrugging off market weakness. This is bloomberg real yield. Jonathan from new york city, i am jonathan ferro. This is bloomberg real yield. I would like to head to the Auction Block now. Highgrade issuers very much fall to the head. We begin with apple. The iphone maker sold 7 billion of unsecured bonds in six parts. It looks to find stock buybacks and dividend. Apple has been the secondmost active u. S. Nonfinancial issuer of debt this year, just behind at t. You had ups with a more than 5 billion offering. The Delivery Company sold debt, and u. S. Treasury sold 23 billion of 10 year notes at 2. 314 . The demand and the yield at the lowest levels since september. Still with me is henry peabody, Subadra Rajappa and ashok bhatia. Lets bring up the chart of the week. For many it is the chart of the year. Many people thought it would get steeper. It has gotten a lot flatter, the yield curve. Pick your place and looks Something Like this. A bounce over the last couple of days, but the trend is pretty clear. What is the signal, the message that comes out of that chart . Subadra you have to look at the yield curve in the context of the current market environment. You have technical factors like the treasuries refunding announcement last week. They will be focusing more on front and issuance. That puts pressure on the backend of the curve. A rallying on the backend. After the funding announcement. You also have some longerterm secular trends that are keeping bond yields at the long end of the curve in check. For instance, demographics is an important consideration. You also have the savings glut, and tremendous demand from overseas accounts. From the longer end of the treasury curve. If you put all of this in context, yes, the curve is a plaque. At some point, it will become a concern for the fed if it does get to be too flat. One, it will really hurt bank profitability. Two, as an investor if you look at the curve, you are not getting adequately compensated for taking risks. Jonathan we have this classic flattening. I wonder whether it is the message for the fed to slow down. Does that have to be their takeaway . Henry i dont think so. In my guess the curve will probably end up shifting higher. That will be a source of volatility. One of the most underappreciated risks in the market today is inflation. Not ready to give up the supply and demand of labor will push prices higher. We expect things to happen sooner than they actually do. I think we probably see the move higher. Your point about the curve, whether it is funds, twos, tens, it does not move as if they think the fed is crediting rates. But they are. The main signal, watch out. There is too much risk. There is too much capital trapped in the long end of the curve that has been reaching for yield through duration that is going to be in a bad spot. Jonathan it is a crowded trade . Henry absolutely. Jonathan what is the evidence . Henry i think what we see is weve had a history dating back since the 1970s, and beforehand, since the inception of the Bloomberg Government index. It has returned to Something Like 7 annually. A 5 volatility. That is supposed to be a risk free asset. You have those numbers that are put in a modern portfolio theory models. You have qe, ldi, passive, price insensitive buyers coming into the market that push prices to where they ought not the long. Not belong. When a bond is bought by virtue of its spot in the model, not for a total return opportunity, it says to me it is a little long in the tooth. Jonathan i feel we have been talking about this for a while. I was having this discussion earlier on bloomberg tv about the cracks in credit. Then a headline dropped from the spanish treasury. 2066, they will issue 50year debt next week. Will the market soak that up in a big way . Many would say yes, it will. Ashok i think the remains there remains demand for longduration sovereign debt in this environment. It is global. It is partly related to what japanese and the european bond curve is occurring. We are thinking about it. The fed is hiking where inflation is at best unclear. That is sort of a big picture recipe for curve flattening. The curve is likely to change. We have potential to change next year if the fed signals it is done and reached the terminal point or inflation starts ticking higher and we believe the fed will accommodate it a little bit. Those will be the two signals for a more structural shift in the curve. Your chart is a trend. It does not look like it is about to break. Jonathan would you say the moves by the Federal Reserve have taken something away from future growth . Something away from Inflation Expectations and of driven the and have driven the long end lower . Subadra absolutely. You have an environment where inflation is relatively benign. You have an environment where the global stock of Central Bank Holdings is very large, and has grown tremendously over the past two or three years. It really takes volatility out of the system. Once the environment where volatility is low and returns are also low, you tend to have this sort of flattening of the curve. Jonathan im thinking about how do we express this in the market . What is the actual trade . It has been really painful. If you dont want to do that, but you see the market developing in the way you anticipate, what is the best way to anticipate that . Ashok i think it is still to be in positions that will benefit from continued curve flattening. It is the time to start thinking about shorter duration, fixed income yields. We have the 10year at 230. This is not the fund rated zero. This is 230 against the 125 funds rate. Investors have to give up less income to come to a shorter duration strategy. It is something we see clients doing. I think that is a trend that will continue. The margin is how you react to what is going on. Jonathan these guys are sticking with me. Henry peabody, Subadra Rajappa and ashok bhatia. Lets get a check on where bonds have been. Treasuries, yields up higher at the long end by about seven basis points. We have been talking about a flatter curve. You end up with a steeper curve to finish the week. Still ahead, the final spread. The week ahead featuring the continuation of president trumps trip to asia. This is bloomberg real yield. Jonathan from new york city, this is bloomberg real yield. Im jonathan ferro. Time for the final spread. Coming up over the next week, the president of United States continuing his First Official trip to asia. Participating in the summit over in the philippines. You have others at the ecb conference. U. S. Economic data includes cpi and earnings from walmart as well. With me around the table is henry peabody, Subadra Rajappa and ashok bhatia. Subadra, earlier this year it felt like the guys were all on the same page. Some got together in portugal for the last ecb conference. They all came out a little bit more hawkish than people expected. Is it coordinated or market chatter it doesnt count for much . Subadra i dont believe this is coordinated. It will be a conference about communication and communication strategies. Communication has been a struggle. If you look back at the last two decades, we have seen an evolution of the communication strategy of the fed, between greenspan, bernanke and yellen. The market tends to overreact sometimes to even small things they say. We saw a large selloff after the taper tantrum in 2013 when ben bernanke spoke in jackson hole. We saw recently the bund market sold quite dramatically after draghis comments at sentra. I think communication is more art than science, and that is something that needs a lot of work. Jonathan why do you think they are struggling to community so to communicate so much . Henry i think there are a great number of constituencies looking for different messages. It is a challenging role. You are talking about markets hanging on your every word. I frankly think they are not doing as awful a job as you might say. The yellen fed has done a good job of communicating its intentions to rollout the Balance Sheet. The ecb, there are a lot of expectations about what the order of operations would be and they clarified that. To a greater extent and that tells us the ecb is probably about a year or two behind the u. S. And that is why we are seeing this growth spurt and that is why we will see two of the largest price insensitive buyers in government bonds walk away slowly from the market. It fits in with the bund move. It says to me watch out for rates. Harp on that topic. Jonathan how responsive will they be to the market moves we have seen in the last week . If credit continues to flatten . We had another deal today. Canyon resource just pulled a deal. That is the Second Energy deal pulled this week. If we go into next week and credit is fragile and these guys take center stage, are the they sensitive to what was happening in the debt market . Ashok i dont think so. These moves are still in the grand scheme a blip. The fed, the ecb, doj, they are looking at the real economy, thinking about if these moves will filter into the real economy and slow growth. I think it is premature to have that view and the Central Banks will view this as we are on a fed path for the hike in december. We are on a Balance Sheet unwind, and what has happened this week is not sufficient to change. Henry i completely agree. You take a longterm chart of spreads, it is really just a small hook at a low level. There are some sectors under pressure, whether it is generic pricing or Balance Sheet issues in the telecoms. This isnt a widespread issue by any stretch of the imagination yet. It is also worth talking about the fact that leverage is extended. We are seeing the tail end of a credit cycle. Now we can extend that with growth, but you see a deal like that be pulled and it is something that is to be expected at some point in the cycle. There has been deal after deal come through. You have seen supply increased radically. One of the things we like to think about is how, when bankers sell something, they know there is demand for it. Bankers are not in the business of having deals fall apart. We are just starting to see it. Watch in a couple of years where bankers can get deals done and thats when you want to buy it. Jonathan it has been great to have you around the table. Thank you for joining me. Henry peabody, Subadra Rajappa and ashok bhatia. Thank you very much. That does it for us from new york. We will see you next friday at 12 30 new york time. 5 30 in london. This is bloomberg real yield. The sector is clear. Not clear, not clear. Emily Electronic Arts conquered the videogame market by making some of the top console games in the world. In 2013, ea was named the Worst Company in america by a consumer blog, not just one, but two years in a row, as social and mobile gaming took off. That is when the ea ceo left the company and longtime employee Andrew Wilson stepped in. Wilson, longtime gamer and surfer has engineered a major