Rates soon. I think they should. A lot of the states are recessionary. Weak economic data. The jobs data was disappointing. Our payrolls are week overall. Pmi came out and it was not great. It was the biggest missing since december 2008. The u. S. Economy is showing signs of fatigue. An economic slowdown. It is still growing. Trailing data is ok. Growth in the states is strong. The outlook has got the Downside Risk with other indicators of people being nervous about trade. It accelerates the pattern of a late cycle. You are in a very late cycle. I think we are closer to the end than people realized. Jonathan joining me around the table now, great to have you with us in studio. The trailing data is ok. What is the outlook look like from your perspective . The trailing data is ok, possibly more than ok depending on what you focus on. However, the headlines and the market in general love to focus on the negative. I do not see as many headlines around the fact that we have had some of the best ism application numbers in a couple of years as we see every time we get a slightly weaker avp number, at a time when we are at a 50 year low in terms of unemployment, et cetera. The fact that there is a sentiment out there that persists around the fed cutting rates is sounding to me is astounding to me considering six months ago, the fed was on track to cut four times over the next 12 months. Jonathan to hike. Oksana sorry, you are correct. And now we have reversed this and the market is expecting three cuts on, essentially, similar data. Something is not right here. I dont think powell will bow to the action and equity markets. Jonathan youre not the only one who thinks that. Capital economics wrote, we continue to expect a sharper slowdown of Economic Growth in the coming months will convince the fed to cut Interest Rates, but the retail sales data reinforces our view that officials are likely to wait until the September Fomc meeting before pulling the trigger. George, thoughts . George i think that is probably right that they will wait until september. But i think they have to. The economy is not nearly as robust as what it was last year at this time, but not nearly as dire either. From our perspective, you are right. A lot of the gdp numbers and inflationary numbers are strong overall, but the fed will cut because the market is pushing them to cuts. They will have to succumb around september time. Jonathan lets talk about the treasury market. Colin, a shout out to you. You came on the show last year and said 10 year treasury yields were going at 2 . Much at 2 now. What now . Colin i think you have a good market with perspectives because we are headed lower. I think the fed will be put in a position that they do have to lower rates by july. I would hope they would do it earlier, but in our conversations, over the months and years, we didnt feel the four hikes last year were warranted, so they went too far, and now they have to pull them back. Sooner as opposed to later would be better, but i would forecast the 10 year treasuries be at 1. 75 before the end of the summer. Oksana this is the challenge investors are facing. Even in the best case scenario, for fixed income, which is lets hope the feds cut here, the ag is already way above it seals with every sector has locked in its yield. Keep in mind as well, the fed is aware of the fact that their actions are going to have limited impact on the economy. Whos going to be incentivized to do anything at 2. 25 that they arent doing a 2. 5 . Their actions can have serious effects on inflating assets. Particularly the stock market. Jonathan george, if you look at expectations for easing, worldwide in Central Banks across the Federal Reserve, the ecb, the boj, the whole lot, increasing investor markets is pretty much in all of them, but we are also pricing for that policy effort not to work. If you look at the fiveyear, and look at growth expectations, we might the pricing that easing, but are we pricing in this stuff working . George i dont know if we are. Inflationary expectations are at lows. Breakevens are at 170 type of level. Overseas, it is even worse. 114 in the europe area. I think the challenge is, what does the fed do at this point . As challenging as it is domestically for the fed, it is more challenging overseas. I think that is the issue that this is a global phenomenon. You see this slowdown globally, and the question is, does the fed react . I think they have to in the u. S. And overseas as well. Jonathan the basic assumption is the fed cuts. The main question is, what are the rate cut 101 trades i need to put on right now for what the fed cuts . The problem is that all of this is determined by so many different variables, conditioned by so many different variables. Not just the first cut. How many cuts . Is this the beginning of a deep rate cut cycle . What about all of the other variables in the trade story . To put it together, there is not much consistency in what trades you should put on and what performs. It comes down to the basic question with a complex answer, what is the outlook for growth . After they start cutting, does it change . Does it improve . Do you have an answer for that . Colin i think it marginally improves, but with our forecast and my forecast, it will stay contained and muted. Im talking about a situation where we have low inflation, or virtually no inflation, stocks stuck at zero, and this is not just domestically, but globally. Interest rates will be lower for longer, gdp growth will be lower for longer, and rates will be lower for longer. I believe what the market is missing is how many eases will happen in the course of this. As george mentioned, the fed has lost control. They are beholden to the market. If investors say you will ease in july, they will ease in july. Question further than that, is it at the next meeting, how many do they go . Oksana if the fed does ease in july, we agree that will not have tremendous impacts on price action, because it is priced in. What is priced in is three more hikes. It considers an area which the fed goes through with three more hikes. What does that mean . Because we are sitting at an inflection point. If we get the hikes, which would be a great thing for fixed income and any other world, you will have a repricing of risk affecting areas like high yield, which are trading rich loans. If you dont get hikes, you will have to see the market move up to what the fed is currently communicating, which is, we are not doing much of anything. You will have a repricing on Interest Rates. This is the time to be defensive. This is the time when defense wins championships. To your point, john, i dont think this is the time to be aggressive with any sort of positioning. George i agree with that last statement. You have to take some type of risk in the market. We are favoring Duration Risk. Jonathan you are . George we dont like credit risk at this point. The fundamental has been weakening. I know we will talk about that, but you have to take some type of risk. That is one risk. The other thing is you have to go down into the sectors and down into structures and do it on the individual basis. So it is a little bit more detailed than the broader risk. Jonathan we will explore that later in the program. I think a very basic exercise to how people get their heads around this bond market is price, colin. It is a question i explored earlier today, which is where will rates be in five years . Take the ecb, Federal Reserve for instance. Take the ecb, its not higher than zero over the next five years. The question you have to ask yourself about the Federal Reserves will the policy rate be higher than it is now in five years time with the fed . George lower. Colin lower. Jonathan most people would say lower. What does that mean for the bond market in the here and now . Colin it means it could be more attractive than some might think. In defense of george, looking at duration, i dont have a problem with that whatsoever. Especially with my view that not only will rates go lower, as we mentioned the fed moves and that there would be more moves than currently priced in the market. I think you would have movement within the fiveyear timeframe. One and 3 8 sounds like a decent central tendency for where it might be five years from now, and i know that is a long time to look. But i would also say we would have a point where we would go below 1 before it came back to somewhere like 1. 25 or 1. 5 . One other thing i would like to point out on where we are and why the fed might need to really look at the markets and think about what they will do is this three month, 10 year inversion. They should be worried about it. They should be seriously worried. If they can adjust and help that inversion come closer or be noninverted by lowering rates, more than is currently projected in the market, to me, that is a good thing. Jonathan i imagine we will get a lot of questions about that next week. Colin robinson will stick with us, as well as george and oksana. Coming up, a volatile oil prices are doing little to derail the junk bonds climbing to fresh record highs. Thats coming up next. This is bloomberg real yield. Jonathan im Jonathan Ferro and this is bloomberg real yield. I would like to head to the Auction Block and begin in europe, on the continent where governments are paying less than ever before to raise funds and sovereign debt markets. 10 year bonds is yielding a record low at 0. 2. Warren Buffetts Berkshire hathaway is selling the biggest sterling bond in almost two years. They 1. 75 billion pound deal that drew 5. 3 billion pounds of offers. In the United States, investment activity remaining robust, led by pfizers one set. The longest portion is 30year security yielding 1. 82 Percentage Points above treasury. Back with me around the table is oksana, george, and colin. Lets talk about it. Where should you be taking risks . Collin was talking about taking Duration Risk. Duration risk versus credit risk right now. Oksana . Oksana neither, but taking Duration Risk is astounding to me, considering threemonth a 60 basis points above the fiveyear treasury. Why would you want to take Duration Risk here . Not to mention, if you think across the pond, why would you pay the government over there for their debt . If you are an investor in germany and cant earn return by lending money to the government. Astounding. When i talk about being defensive, it is not taking on duration as it did in prior cycles. It means highquality floatingrate orientation in our portfolios. Things like Investment Grade floaters, opportunities in the mortgage credit rates, opportunities tied to the consumer. The consumer is doing well as the recent retail number supports consumers. 70 of the u. S. Economy. The bottom line is, be constructive on the economy. Or we are constructive on the economy. Very bearish on prices. Prices dont allow for much appreciation. And that is the dilemma of fixed income. Jonathan the bank of america is taking the same line as you, writing the following about credit that the market is misreading the feds intention to cut rates at a time when risk assets are fully nearly priced. Something has to give here, and either risk needs to be marked out or rates need to go higher. Which is it . Oksana rates should be higher. Academically, what are rates . The rate of inflation plus growth. Between 1970 and 2007, you got 97 of the 10 year treasury if you those. Currently, you get 40 . We still have inflation and we still do have growth. Our rates dont reflect it because they are entirely, artificially suppressed by banks here and across the pond. George i agree that they are. I dont think it changes soon. When you look globally at rates, right now, our 10year looks attractive to 24 or 27 basis points overseas. If you have that mechanism, and that Money Capital coming over here to get lower rates, where is that coming from . I think, for the shortterm, play the duration game. The credit side is more concerning. Oksana that is likely the real reason for the inversion we are seeing, the demand from overseas. How do you square that with liking highyield . It is not really an indicator or if you do believe it is an indicator of slowing down, how do you square that with risk if you think the inverted curve is hardening . Jonathan you like highyield. Walk us through it. Colin i do like highyield. This is all premised on the fact that growth stays low but doesnt go below zero. That inflation stays very low and is stuck at the low level, and then Interest Rates are going to move down. When i consider highyield, and i get it, 8. 9 year returns, i totally understand where oksana would come from. That is quite a return in this period of time. If you look back and think about last december and the start of the year, nobody would have forecasted we would have had a 9 yeartodate return. If you go with where rates would be on my thought process, the fed will have to move more than the market thinks and investors think. Also, i dont dislike credit, of course, but we could basically, clip that the coupon. There is a real surge for yield globally. If im going to clip the coupon in highyield for the rest of the year, i like it. Jonathan it is an argument made any times on this program, especially the last months. Essentially, you can pull down the volatility within your portfolio by taking out equity and pushing in highyield. You will not miss out much on the upside. This is the basic argument. On the drawdown, it will be less severe and risk adjustment is the better option. Is that the argument you are essentially making today . Colin that is one of the arguments we always make. If you look at last december, and the way highyield to perform versus the equity market, and even the more recent periods this year, volatility highyield highyield volatility wise has been much preferred to equities. That is part of our thought process and why we like it. Jonathan the issue i have is the amount of people that say get defensive. When i look at the highyield, actually see it. Triple cs are outperforming. I see the triple bs outperform the singleas. In Investment Grade, it is totally different. When people Start Talking about going up in quality, i see that playing out in the price action highyield, not so much in Investment Grade. Why not, oksana . Oksana triple bs have become a really a very interesting place because the size of the triple b market has dwarfed the size of highyield market. Even if you are constructive on highyield fundamentals, which we are, one of the reasons we arent jumping into that space is because triple bs, just by way of their fundamentals alone, should go through a much much more significant downgrade cycle. So far this year, i think we have seen. 1 . 4 downgraded. Why are they outperforming . They have become somewhat of a proxy for higher yield exposure in Investment Grade. You can pick up a coupon and all of the demand is going there. You are starting to see more and highyield etfs et cetera. It is a technical story which could reverse. That will choke the highyield market and, therefore, we go back to this mantra of be defensive, have liquidity at the ready, this will happen. There will be opportunity. Jonathan just to explore triple bs at the moment, the big concern is we go into a decelerating growth environment and the triple b universe starts to get downgraded, then we have real problems. The Global Market is almost priced to perfection. I know that gets thrown around loosely, but what i mean by that is treasuries have been big because people are looking for rate cuts. Risk assets are also well bid because people think of all the soft landing. What i found interesting in this week is when we got the broadcom release at the back end of the week. What was interesting, the information content was not in the press release, it was in the price section of the equity. When the press release came out, they said it would be a tough year. In semis . Really . That is a surprise . Apparently it was a surprise for equity. Why i think this is important is because maybe we have not factored in the decelerating growth environment in the second half of this year and what it might mean for risk assets. We have priced rate cuts, but are also pricing in the soft landing. Are you happy to say, i am constructive about the second half . I will get the rate cuts, and where we are priced now will be validated, but risk assets as him well . George i think thats a good point. Right now, it is the idea of what are the fundamentals telling us . Fundamentals have been weakening. They have been weakening for a long time. You are looking at highyield and see leverage creeping up, see coverage ratios weaken, margins weakening. The question is, does the market care . People are grabbing yield. They are grabbing yield no matter what the fundamentals are underlying. The market does not care. When does that catch up . In the next six to 12 months. Along the way, you can clip coupons. It is an ok trade, but with the risk associated with it, it is pretty high. From a riskreward perspective, you will get some reward but take a lot of risk. Jonathan george is sticking with us as well as oksana and colin. I want to give you a market check. Treasury yields are as follows. We creep lower on the twoyear by a single basis point at 1. 84. Rather unchanged going into an fomc decision. Just a few days away. Still ahead, the final spread. It is a big one in the week ahead, featuring the fed decision and a News Conference with chair powell. That is next in this is bloomberg real yield. Him him him him jonathan im Jonathan Ferro. This is bloomberg real yield and it is time for the final spread. What a week ahead we got. It starts on monday. Ecb president mario draghi speaking from portugal. Tuesday, we get u. S. Housing starts. Wednesday, a fed decision. And they chairman powell News Conference. Thursday, a Rate Decision from the boj and boe. Friday, pmi data from the eurozone and from the United States as well. With me around the table is oksana, george, and collin still colin still with us. A viewer question comes in and i want to ask it because i think it is important. We have spent so many weeks exploring what you should and should not do when the fed starts to cut Interest Rates. What if they dont . What if they dont signal one next week . What happens in this market . Oksana markets react. They start to move up to what the fed has been communicating all along. You have to realize that the cuts have been priced in. So to expect really dramatic price action on the back of a cut, i think is really overly optimistic. What we should expect in times of a price reaction, is from a data standpoint, the fed does not have to do anything, and they want to continue to appear independence, and so they should not do anything. And that is a different story. Jonathan lets get to the rapidfire round. We will start with the Federal Reserve. Looking ahead to next week, the first question, does the fed drop the word patient going into next week . George . George yes. Oksana no. Colin absolutely. Jonathan five years from now, will the fed policy rate be higher or lower than now . Oksana . Oksana higher. Jonathan really . George . George lower. Jonathan colin . Colin lower. Jonathan the third and final question. On credit, and ive asked this before, have we seen the credit tides of this cycle, yes or no . Colin . Colin no. Search for yield. Jonathan okasana . Oksana we have not. That is why you have to sell, because it is easy to sell right now. George i agree with that. You need to sell right now. Jonathan oksana, george, colin, great to catch up with you. That does it for us from new york. See you next friday at 1 00 p. M. New york time, 6 00 p. M. In london. This was bloomberg real yield. This is bloomberg tv. Scarlet i am scarlet fu. This is etf iq. Scarlet a marriage of convenience, the hottest etf, a fighter known as the boa constrictor to tap the millennial investor interest. Trading on fixed income. Blackrock shares the risks and rewards of high yields. And if you are searching for