The threshold is extremely high. Impossibly high. They may get back in. Conditions have to worsen. If something dramatic happens. Or inflation has to majorly overshoot their level. They dont want to be the reason the markets fall off but they dont want to be the reason they go up. They are not going up or down. They will probably try to stay out of the spotlight. Jonathan joining me around the table, diana amoa, gregory peters, and in london, Andrew Chorlton. Andy, your thoughts on the threshold to bring the fed back to the table in 2020. Andy i think if we put aside what happened overnight, because i think that is much more complex, otherwise, i dont think the fed is coming back to the table anytime soon. I think the same can be said of basically all Central Banks in the g7. No one is expecting anything from anyone. We are in a very benign period, absent any further escalation to political issues. Jonathan diana, is that your take . Diana for the first half of the year we are likely to see the fed remain on hold. In the second half of the year, we could see them come back into play, especially because we dont see much followthrough on growth in the u. S. And the pressures remain contained. Jonathan greg . Greg i think consensus is right that the fed is on hold but a year is a long time, so a lot can change and we learned that overnight. I think the base case is right but i think it is important to retest the base case and not get too comfortable. Jonathan some see more more slack in the labor market than before, but the way they respond to data has shifted too. How key is that . Greg you look at the dot plot that has been dramatic. That shows you how their minds have shifted, but i still think they are surprised by the lack of inflation. The labor market is still tight, not as tight as they thought, perhaps, but you are not seeing the inflation that i think everyone at the fed expected and i think as a result, they will continue to run the experiment a little hot. Jonathan you expect to see it anytime soon . Greg not really. It is firming and has come off the bottom, but to have a big uptick in inflation, i dont see it. Jonathan diana . Diana we think inflation will get to two this year, and will be close to that, but i think the fed will want it to stay at that level. I think that is what will be put into play. Jonathan andy . Andy i think thats spot on when it comes to inflation. If you get the uptick in inflation, i think they will let it ride and i think peoples expectations have become so benign in recent years that inflation is not really the problem, they are focusing on growth or any challenge to the growth outlook. Their focus on the others, hiking rates to defend against inflation. The kind of know they can control that side of it. Jonathan does that keep a lid on 10 year treasuries at 2 or lower . Andy not necessarily lower than 2 , but in the 2 area. We could get toward 2. 25 . This time of year, you look at outlooks for 2020 and lots of people are predicting rates much higher. I think they are looking for volatility where it doesnt exist. I think the rate environment will be benign and credit is where the problems are. Jonathan looking at the bloomberg terminal, year end, 193. You look for numbers around 120, 125. Where do you come down on this debate . Greg i still think its range bound at some 2 . But the way i think about it and the way we think about it, the world can handle higher rates. Thats what we learned in 2018, and sure the fed was in play and Central Banks were moving, but real rates moved up and that was the killer to risk. My number one focus for 2020 continues to be the level of real rates. If real rates move higher, i think it is a risk off environment. Jonathan any move higher is selflimiting because any move higher creates a risk off environment and the bid comes back in . Greg correct. Jonathan is that your thought, diana . Diana it is. It has been our call for the last year that anytime you get close to the 2 rate, you need to have duration. It would not take much to get back to growth again. The rest of the world, rates are in negative territory and that demand for duration remains anchored. Jonathan what does it mean for bunds . Greg i think its a little different when you have ecb in transition, but absent that, yes. But the fly in the ointment is that the ecb is recalibrating, rethinking the strategy going forward, and that adds risk premium into the curve across europe. Jonathan lets talk about the shape of the curve in the u. S. The inverted last summer and started to steepen into the back end of 2019, how does that materialize . Greg i still believe the bias for the curve is to flatten and not steepen. It points back to the real rate argument. I think it pulls it down. It is not representative of a decline in economic growth, it is more of a need. To the point where there are negative rates everywhere else, the higher it is above zero relative, the more attractive it is. Jonathan andy, your thoughts on how much steeper the curve can get in the u. S. . We had some come through into 2020. Do you think it can continue . Andy i think it can continue based on domestic factors, but as greg says, as soon as you get any reasonable yield anywhere, people pounce, which limits the move higher. I think it makes some sense to have a steeper u. S. Curve because ultimately i think they need to price in the risk of inflation picking up, you need to price in the risk perhaps a further issuance on the longer end if the treasury decides to shift. But to gregs point, i think things will be limited in the absence of anything else worth buying. Jonathan how important is the front end of the yield curve . Greg i think its critically important. The big hiccup in the market and what i was concerned about year end that the fed alleviated, have a wellfunctioning funding market is critically important to fixed income and the movement of capital. The fact the fed has stepped in, there are still more work to do, but injecting the front end program has been really important. I expect that to continue until there are other fixes. Jonathan have they addressed those issues where they can think about backing away again . Greg i think its too premature for that. They need to lay out a roadmap and there are other things beyond their control and much more difficult just from a regulatory standpoint. Banks are penalized on treasuries. The kindat im of thing that im thinking about for 2020 is to what extent the fed will be backed into a corner with the Balance Sheet. They find it difficult to back away from the operations at the moment. There is a separate issue that we have some areas of the market, many viewers would disagree, but some areas believe this is qe. And because of that they are bidding up risk assets. If the fed starts to say, we have backed away from some of these operations, the Balance Sheet starts to go the other way again. What do they do . Greg i think its really difficult for them to get out. Thats going back to the ecb experience where they feel trapped, same thing with the boj. The fed doesnt want to be trapped but i think they are. This isnt qe, it just looks and feels like qe, and the difference is there is no duration to it and it doesnt have the same impact. Theres also talk in some circles on how they will help funding by going out the curve. Jonathan diana . Diana i think it certainly trades like qe. I get the point on duration not being bought, maybe not anchoring the yield curve, but the amount of reserve in the system is increasing in the fed is increasing liquidity. We are seeing equities in risk assets across the board. I feel like this could be tricky for markets to maneuver this year. Jonathan our guests will be sticking with us. Coming up, the highgrade bond market gearing up for a big month of sales following a slow december. That is coming up next. This is bloomberg real yield. Jonathan im Jonathan Ferro and this is bloomberg real yield. To the Auction Block in europe, where the primary market is starting to shake back to life with a handful of deals to close out the week. Three sterling offerings in the spotlight, including sales from nationwide building society. The highgrade building market gearing up. Reinsurance group of america making up a thin pipeline expected to grow in the coming days and weeks. It could be a busy month for u. S. Highyield issuance. Junk bonds scheduled to mature this month as Companies Look to refinance debt while borrowing costs remain cheap. S P Global Ratings most bearish on corporate debt than at any point in the decade. The most down grades for complete relative to upgrades since 2009. With me, diana amoa and greg peters, and Andrew Chorlton in london. We know the story of the price action. Greg theyve given companies the benefit of the doubt the past five years. Theres been a slowdown of cash flow growth, its manifest in earnings. This is somewhat of a topping off. I dont view this as a really horrible trend per se. It is a little slow to react as quite frankly in years prior, there has been so much leverage put onto the Balance Sheets that they quite possibly did not deserve the ratings in the first place. Jonathan when you hear things like the most down grades relative to upgrades since 2009, people worry when they hear the number 2009. Should they be concerned about the Credit Ratings for some of these come in his relative to where they are priced currently . Andy i think the pricing is the issue opposed to the fundamentals. The pricing is way ahead of the fundamentals because of the qe and the search for yield. You saw this in highyield last year where the cccs didnt do so well. I think you will see companies that are on top of deleveraging plans and following through, and they will be rewarded, and those that dont show discipline will be punished. Theres no question that prices are expensive of credit. You dont get the kind of excess returns we have lester across pretty much every sector. You cant get that without materially changing something and people should be cautious in credit just because the entry point. Jonathan greg, do you agree . Greg not really. You should always be cautious in credit, there is nothing but downside and upside is very limited, and thats very much the case. But its still a decent environment for credit, pricing has come a long way in a short time. A lot of that was a reversal of the prior year. I think, unless you see a real uptick and companies continuing to trash the Balance Sheet. Theres been more of a downgrade but you havent seen companies actually look to impair their balance. I think that is important. I think its too early to sell the credit rally and theres too much negativity around bbb and around highyield bonds in particular. Jonathan bbb had a fantastic year in 2019 and ccc did not until december of 2019. Are you on the bandwagon for 2020 . Greg we were on the show in november and you asked me the question and it was too early, but there has been such a big price dislocation. For us, theres much more value in single b and ccc. Versus double bs for example. I see value in the capital structure at least for now. If pricing changes, then we will exit. Jonathan diana . Diana i think you need to be select, but with the fed Balance Sheet still increasing and you have a relatively easy monetary conditions, there is money to be made further down the credit spectrum. I think for the first part of the year, it will not be a rally in every thing should be supported barring a geopolitical shock. Everything should be supported by the external backdrop. I thought the s p report was interesting because the things they are talking about are things that markets have talked about a long time. The auto sector, the problem child, is flagging and could be one that needs to adjust more. We have seen some improvement in other sectors. In ccc, it is Energy Stocks that have underperformed. You look at where the valuations compensate. Jonathan bloomberg has crunched some of the numbers with the Credit Ratings, 11 to one was the downgrade to upgrade ratio in 2019, which is terrible. To gregs point, if youre going to start looking at the areas of the market that were lacking in 2019, is that an area you would be willing to look at . Is a cyclical tailwind enough to offset what are very big structural issues in that particular area and that particular sector . Diana again, its on a name by name basis. I think the structural issues, in the u. S. They are talking about market saturation and thats not going to go away. The sector may have gotten a boost from what the fed did last year, so the Consumer Credit becoming more accessible, but again, its very much a name by name basis. Some of the bbb auto are expected to be downgraded this year. The markets are pricing that into an extent. In europe, i think the Balance Sheet is slightly stronger, some of the names have been hit hard. They have been forced to get up to speed sooner. Again, very much on the name by name basis rather than a sector. I think longterm challenges for the sector will remain with us. Jonathan andy, a quick word on the auto sector . Andy there are some fundamental problems that need to be addressed in terms of the change in the sector. Same thing with the energy sector, its going through a fundamental change in how people buy cars and the type of cars they are buying. I think the challenge with europe, looking more generically at european credit, last year over 5 and the index yields about 50 basis points. I dont really understand how people can come into 2020 with a particularly bullish view on credit given the returns we have enjoyed in 2019. I think autos, again, it will be name by name, but in that area, there may be the opportunity to pick some names that deliver and recognize the challenges. But it is another sector in transition. Jonathan final word around the desk . Greg i think its time to be invested in credit. I think its too early, it is name by name, it is dispersion. I think it is a place for alpha. Jonathan that coming up, the week ahead. This is bloomberg real yield. Jonathan im Jonathan Ferro and this is bloomberg real yield. In the next week, fmoc president taking center stage. Plus, economic reports out of the u. S. , including factory orders. The main event, next friday, the u. S. Payrolls report. Diana, just to pick up on where we ended the week with a really weak manufacturing in the u. S. Should we be worried about what is happening . Diana i think thats been one of our big concerns, that the markets were getting a bit ahead of themselves and thats why we think being in duration in the u. S. Make sense. The economy is not picking up to the extent the markets seem to be anticipating, at least the equity markets. I thought the ism today when you look at the underlying data, there is just general weakness. Employment also came in lower than expectation. That should makes next weeks payroll data interesting. Given that the markets expect something fairly robust. I think if we see downside, they might have to rethink. Jonathan the hope more than everything is to see destabilization in china, and if we see it in europe, the u. S. Will lag manufacturing recovery but not lead it, and it will be the last out. Is that the right approach . Greg i think its more concurrent. Clearly, europe has been copied between the u. S. And china, and they should definitely react, but they are separate. Just because the u. S. Entered last doesnt mean it will not be the first to exit, either. I think people are too negative on the u. S. In terms of that. But it bears watching. What todays numbers full due is that the consumer better hold up because that is the key driver to the economy. Jonathan so far, so good into 2020. Its get to the rapid, three quick questions and three quick answers if you can. First question, can highyield credit spreads in the u. S. Breakthrough 300 basis points in 2020 . Yes or no . Greg yes. Andy no. Diana yes. Jonathan will 2020 be the year of ccc in the u. S. . Diana no. Andy no. Greg yes. Jonathan on the u. S. 10 year, can we retest the 2019 lows on 10 year treasury lows, yes or no . Andy no. Greg yes. Diana absolutely. Jonathan guys, great to catch up. We will see you next friday at 1 00 p. M. New york time and 6 00 p. M. In london. This was bloomberg real yield, this is bloomberg tv. Taylor i am taylor riggs in for emily chang, and this is the best of bloomberg technology, where we bring you all of our top interviews from this week in tech. Coming up, the California Consumer privacy act. The law is now in effect but not without controversy. We will discuss how companies are interpreting the statute meant to standardize data mining practices. Plus, cybersecurity in 2020. What new threats lurk online and wille