The lack of bad news is probably good news. Kicking the can down the road will be just fine. We will end up with a stand off agreement. Not to disagree so violently that trade talks writedown. You get a reset to restart the discussions. We will continue talking. If things go bad, we could be panicking on monday. Lets say there is an escalation. They storm away from the bargaining table. That that will probably cut by 50 basis points, not 25 in july. , the dont need tariffs fed is going to be dovish. Taylor joining me is ken taubes, david leduc, and coming from our Princeton Bureau is ira jersey of bloomberg intelligence. David, we just heard about the g20. Coming into the show, what is the key risk or questions you are hearing from clients . Is it all about the g20 . Questions are what is happening with the g20 and more broadly, trade policy, trade risks in the market. The other thing they want to know about is the fed, are they going to cut Interest Rates this year, how are these related, what will happen . Taylor how much of the bond markets are pricing in a deal or no deal . How much are we pricing in ahead of saturday . The bond markets are still pricing in a deal. You have seen credit spreads narrow, equity markets rebound to near highs. This is on the hopes of not just the fed easing but also that we will get some trade agreement in the next months. I dont think the market is expecting a fantastic deal, just a deescalation and no further damage from these negotiations. Taylor ira jersey in princeton, would you agree with my guests on set that we are pricing in perhaps a small deal or further kicking the can down the road . Ira i think in risk asset markets, that is right. And the treasury market, you would get a backup in higher yields that markets will continue to price in cuts. Some of the damage from trade has been done. When you look at the survey measures from all the regional fed surveys, they are all pointing downward. That does not bode well for the next three to six months of Economic Data. The fed cutting would not be out of the question at all. 50 is probably off the table in july, but 25 is more than 100 priced in now. Taylor ira launching right in with those prediction for rate cuts. The first big question is always about trade but very close second place is all about the fed. I wonder how much of the trade deal really matters if we know that the fed will bail us out anyways . David the trade deal matters because the fed cutting Interest Rates will not solve all the problems, will not keep the economy out of recession. We need real activity. Interest rates have been low. The demand for cheaper credit i dont think will be enough to fully keep the economy on track without a trade resolution at some point. There are High Expectations on what low rates can do being priced into the markets. I would agree that i think the markets are pricing in both, at least improvement on the trade negotiations coming out of g20, and also counting on the fed to lower Interest Rates indefinitely. Taylor as we talk about lower Interest Rates, Goldman Sachs joining j. P. Morgan in cutting their yearend forecast for yields on the u. S. 10 year, now 21. 75. The global rally in yields is likely to continue, driven by accommodative central banks, nearterm weakness in data and in asymmetric sets of risk. In the u. S. , we believe reassuring growth data and an eventual reduction in trade war risks are probably necessary for the fed to cease using once it begins. Look at that 1. 75. , we are at 2 now. Do you assume the path is lower for longer and we dipped down below two . Ken it is possible. Right now the weakness in the manufacturing sector. They are Getting Press into a rate cut this meeting because we have almost 100 certainty priced in. Whenever it is over 50 , they tend to follow markets. They will cut rates here and get the yield curve positively sloped, but they have a tough job. The Economic Data is not that bad, as we heard. The surveys are weak, but the actual data is not. You could argue consumer spending, two thirds of the economy, is accelerating in the Second Quarter compared to the first. The weakness is in manufacturing. There is a lot of hesitancy because of the uncertainty of trade. There is a lot of confusion. That is creating some hesitancy in investing. Also, the data on the pmi, surveys are weak also because boeing is not having any orders, very few. They are big enough to affect the pmis. That is microeconomic specific to that company. One of these days, the 737 will start flying again and orders will pick up. I also wonder, the Inventory Data has been instrumental in pushing down the pmi, concerns about cutting production, and i wonder if some of it has not been deliberate to beat the trade tariffs. Deliberate inventory build is different than consumer demand falling off the cliff, and companies apprised about their inventories. I wonder if the data is skewed on the downside. The fed will for the first time in memory give us an insurance cut. Taylor i want to talk about the data. Ira jersey, you heard ken talk about getting the yield curve back up to a positiveslope. In your research, you talk about a positive slopw going into 2020. Is yield curve steepening coming from the front end of the Federal Reserve cutting rates . Ira a little bit of both. If the Federal Reserve cuts and you get the better data, presumably, 10year yield will be higher than 2 . Our end of the your scenario is for 10year yield to be close to 2. 25. Kind of where we were from a couple months ago but a little bit higher, while the fed has eased Monetary Policy. That should steepen the yield curve a little bit. On the yield curve, even if it had were to continue cutting, i suspect you would not get as steep yield curve as you usually do in recoveries primarily because everyone will be worried that qe is on the way. Once the fed cuts 200 basis points, everyone will Start Talking about qe. That will keep yields much lower than they have been in previous cycles. Taylor we have to get to yesterdays great interview with the San Francisco fed president mary daly. She says she is watching the data closely. If the data comes in and show significant weakening, that would call for different actions, then if the data came in and said we are getting headwinds and slowing. It is too early from my perspective to know whether we should use the tool at all and what magnitude of the tool we should apply. Taylor david, i want to turn to you. We were talking about how much we expect the fed to cut. Seems like it is a very onesided trade. The market really looking for even 100 basis points this year into next year. Do you agree with that . David the market is expecting a lot, for a lot of reasons that ken talked about. Slowing data, particularly on the manufacturing side. But if you look at financial conditions, they are still loose. Growth has been above trend. Unemployment below the natural rate. The fed is in a tough spot here. They are reacting to potential headwinds from these trade negotiations, some things they arent serving from that. I agree they will do an insurance cut here and we think as much as 50 basis points. Part of the reason is there is a lot of literature that says if you are going to do something, you are worried about getting to that lower zero bound of rates, what you need to do is something aggressive and do it early, so that its effective to avoid getting there. We could get a 50 basis point cut in july but i also think the markets are too aggressive in pricing in 100 basis points this year. Taylor we used to think zero was a lower bound but mario draghi showing us that it is necessarily not lower bound. Ken, you talk about the data. Mario draghi of all people knows that we cannot cut our way to get inflation. The flipside of that is to look at the Economic Data. Is the data bad enough to warrant a 100 basis point cut like the market is pricing in . Ken in the u. S. , i doubt it. The fed probably overdid it a little bit in inverting the yield curve. I believe it still gives us some leading indications of where the economy is going. But it is indicating a slow down not recession, in my view. To right size this, they have to take back one of the last few hikes. That is what we need now to get financing of inventories, bond portfolios to be positively sloped again, and not as difficult as it is with tightening liquidity. One thing i would add, i think the fed has given short thrift to changing their Balance Sheet activity more quickly. They had pushed forward the date they will stop shrieking the Balance Sheet, but the economy needs to grow 4 nominal gdp, 2 real. Just stopping is still a tightening. You see it in the Banking System where liquidity has tightened up excess reserves. I wonder, rather than pushing Financial Assets to more expensive levels, why dont you directly provide liquidity to where its needed into the Banking System and lending markets . Stopping the quantitative tightening earlier and increasing the Balance Sheet would help in that regard. Taylor more on that conversation next. Coming up, the auction block. Dovish signal from the Federal Reserve boosted demand for higheryielding assets. Junk bonds heading for the best returns since january. That is happening next. This is bloomberg real yield. Taylor im taylor riggs. This is bloomberg real yield. I want to go to the auction block. We begin here in the united states. The treasury sold 32 billion in sevenyear notes yielding 1. 889 , the lowest since 2016. Direct bidders coming out in full force purchasing the largest portion since february. The hunt for yield in full swing in europe. More than four times subscribed and priced to yield, 1. 71 . U. S. And junkbond issuance moving at a torrid pace with 8. 6 billion pricing, making it the biggest week in nearly two months. June is heading for the busiest month of highyield sales since september of 2017. Still with me his ken taubes, david leduc, ira jersey. U. S. Junk bonds hitting fresh record highs or the First Time Since the financial crisis. Jpmorgan is selling the Corporate Bond rally instead of buying that it. Marc lehman weighing in on that strategy today. There are warning signs out there that people are starting to pay attention. By the looks of the stock market and bond market, not huge attention. When we had that big correction back in december, the risk reward was enormously favorable to the upside because nothing changed. Right now we are at a new high in every asset class. When everything goes up, that is probably not a great sign. Taylor you heard it there. The everything rally. Do you sell credit heading into any sort of gains that we see . We have been selling credit steadily all year. We see more risk in the future outlook, trade tensions have been starting to create a drag on certain set yours. For us, valuation is a big issue in the Corporate Bond market. Almost three heard 80 basis points of access returns on Investment GradeCorporate Bonds. Highyield, over six basis points over treasuries this year. As we look at highyield spreads over 400, Investment Grade, these sectors are looking more fairly valued to us. In my mind, if you made a lot of profits in something that has risky characteristics and there is still increasing uncertainty in the outlook, you are supposed be lightening up on that risk. Taylor do we feel stretched . We have talked in the first half of the year, equities are higher, bonds are higher. At some point, something has to give. How stretched do credit valuations feel in the market right now . Ken any kind of credit as it is expensive by historical standards. We have been easing Monetary Policy for the past year and a half. Much of the easing is still going on globally. Everything is expensive. I think there are some bad behaviors that have clearly creeped into the markets the last few years. However, over 30 years as a value investor, you need a catalyst to see spreads wider. The catalysts usually are a recession. May be induced by over tightening from the fed. We saw spreads widen briefly last year on that risk. Now that the market is anticipating fed cuts, ive never seen a disaster in credit in the face of fed easing. And i have never seen recession with Oil Prices Dropping yearoveryear, never seen a recession led by financial conditions easing, not tightening, which is happening this year. We are at a point when things are very expensive, not the most expensive they have been, but you need a catalyst. For now it will be ok. Painfully, if you have been out of credit, you missed a huge opportunity this year. Taylor ira, we know that you focus more on the rate strategy of things. When you look at credit, how stretched do valuations feel to you . Ira valuations are stretched. Credit spreads can stay tight for a long time. There has to be a catalyst and usually it is a slowing economy that winds up causing widening, particularly tread widening in credit spreads. There is a risk with corporate credit. What if the fed does not deliver what is currently priced . If the Federal Reserve were to cut 50 basis points in july but then signaled they are not going to cut any more than that, some risk assets may not take that very favorably and you could wind up seeing volatility in spreads and equity markets. Taylor we can get into the nittygritty. Part of that is the terminal chart we have showing the spread between bbb and bb. Is this an easy trade that automatically you sell bb, go up a little bit in quality, cast that bbb spread, and then all is well in the world . In david i wish investing was that easy, would have made my career a lot easier. I think we agree that i agree with ken and ira that you have to have some carry in the portfolio. If you have the fed providing more accommodation, it will extend the rally longer, even if you dont like the valuation. There are two places this could go wrong. I agree, if the fed does not deliver what the markets think, they will be disappointed, and youll see risk premiums go up. The other thing is the trade war. If for some reason this continues to degenerate, extends a lot longer than people think, or this administration pivots after reaching a resolution with china, to europe, there is downside on that which our clients are talking about. Getting out of tighter highyield spreads into Investment Grade makes a lot of sense. Looking at assetbacked securities. The fed is providing some stimulus year. Perhaps some inflationlinked bond is not a bad idea either. Taylor lets get a check on where the bond market has been this week. It just continues to be a rally across the curve. What catches my eye is the 2 print, exactly on the 10 year. Down five basis points for the week. Im looking at a key 1. 99. Going out to the 30year, 2. 53, testing the crucial 2. 50. Still ahead, the final spread. The week ahead featuring the highly anticipated jobs report amid a holiday shortened week of trade. That is coming up next. This is bloomberg real yield. Taylor im taylor riggs in for jonathan ferro. This is bloomberg real yield. Coming up over the next week, President Trump meets xi in a in osaka the weekend for the g20 summit. Monday, opec meeting in the in a. Wednesday, more economic reports from the u. S. Durable goods and factory orders. Plus trade balance numbers. Thursday, u. S. Markets are closed for the fourth of july holiday. Friday, of course, all about the main event, it is jobs day to close out the week. Ken taubes, david leduc, ira jersey still with me. David, i have to start with you. What number are you looking for that could tip the scale in either direction for the Federal Reserve . David i dont know there is one number the Federal Reserve will rely on solely to make policy. Our view is the fed is considering making a 25 if not 50 basis point cut. We think there is a chance they have scope for doing that. The markets have priced in. Its an easy way of providing insurance. A really strong job number perhaps gives them some pause, but they are looking at a much longer string of data than just one data point to make that decision. Taylor that leads me into my first question in the rapidfire around. 25 or 50 basis point cut by the fed in july . Ken 25. David 50. Ira 25. Taylor g20, deal or no deal, kick the can down the road . Ken no progress. David kick the can. Ira kick the can. Taylor yields above or below 2 . Ken above. David above. Ira barely above. Taylor ken taubes, david leduc, ira jersey, thank you for joining me. From new york, that does it for us. Jonathan ferro returns next friday at 1 00 new york time, 6 00 london. This is bloomberg real yield. Emily as a young black girl in dallas, texas in the 1980s, she quickly learned she could not fulfill her dreams without breaking some rules. The daughter of a single mom, she talked her way into the music industry, becoming a tour manager for a norwegian punk band and learning the art of the deal backstage. She found her way to silicon valley. By day she pitched her big idea. Ni