The fed may get pulled back in. Massive escalation and geopolitical tensions. Inflation has to majorly overshoot their level. They have left the door open. They do not want to be the reason the markets fall off, but they do not want to be the reason they are going off. Theyre probably going to stay off the spotlight. , greg peters,a joining us from london, andy. Your thoughts on that the threshold to bring the fed back to the table in 2020 . If we put to one side what happened overnight, it is much more complex. The reaction from iran will be important. I do not think the fed will come back to the table anytime soon. I think the same can be said for the Central Banks in the g7. I think we are in a very benign. , absent any further escalation in the geopolitical. If you look at the pricing, though it is jonathan lets bring the conversation around the table here in new york diana, is that your take as well. Airor the first half of the we are likely to see the fed remain on hold. He could see them come back to play, especially because we do not see much of a followthrough on growth in the u. S. I think consensus is right. The fed is very much on hold. You look at the plot, it has been pretty dramatic. That tells you how their minds have shifted. I think they are surprised by the lack of inflation. The labor market is still tight. Perhaps not as tight as they expected, but you are not seeing inflation that everyone at the fed expected. I think as a result they will continue to run this experiment a little hot. Do you expect to see it anytime soon . Not really. It has come off the bottom, but do you have a big uptake and inflation . I do not see it. Toi think inflation will get this year, but i think the fed will want it to to be at that level until Inflation Expectations this is the year it is happening. Ideas resonate with you, andy . If you do get an uptick and inflation, they will let it ride. I think peoples expectations have become so benign in recent years, inflation is not the problem they are focusing on. Any challenge to the Growth Outlook focuses on the others. They can of know control that side of the equation. Jonathan does that keep a lid on 10 year treasury yield around 2 and lower . Not necessarily. Certainly in the 2 area we could easily tick above it. Interestingly, at this time of year you look at everybodys outlooks for 2020 and lots of people are predicting rates much higher. I think they are looking for volatility where volatility does not exist. I think it will be benign. Wherek it is credit volatility will not solve our problems. 1. 93 on ayearend u. S. Tenyear. You look at some of the calls out there, looking for nobles in and around 1. 25. Where do you come on the rates debate . We do see a range, but the way i think about it, it is quite simply that the world cannot handle higher rates. That is what we learned in 2018. Sure the fed was in play and Central Banks were moving, real rates moved up and that was a 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. Any move higher is is that your thought as well, diana . It has been our call for the last year. Anytime we get to that 2 range, you should be buying a little bit of duration, because the recovery is extremely fragile. It would not take much lets not forget, the rest of the worlds rates are in negative dirt territory. Jonathan if that dynamic is trip treasuries, what does it mean for buns bonds . Gregory you have any cb in transition, but absent that yes. Transition, but absent that yes. That asks risk into the curve across europe. Jonathan lets talk about the shape of the curve in the United States. We inverted the last summer. How do you see that materializing in 2020 . Gregory i still believe the bias for the curve is to flatten not to steepen, which points back to this real rate argument. When rates move higher, there is a bid for u. S. Assets. That pulls down. It is not representative of a decline in Economic Growth or anything like that. It is 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 this curve can get in the United States . We had some steepness come through into 2020. Cannot continue . Diana i think it continue. Think it can anytime you get any reasonable yield anywhere, people pounce on it, which limits the move higher. It makes some sense to steepen the u. S. Curve, because ultimately you need to price in the risk of inflation picking up, you need to price in the risk of the government, the treasury to gregs point, i think things will be limited because people continue to buy the u. S. Market in the absence of anything else worth buying. I think it is critically important. The thing i was really concerned about going into the years end that the fed eliminated was what is going on in funding. There is oh having a wellfunctioning funding market is crucial to the movement of capital. The fact that the fed has stepped in, there are still more work to do, but injecting that front end program has been really important. I expect that to continue. Jonathan do you think some of those some funding do you think they have fixed some of those funding issues to the point where they can think about backing off again . Gregory there are some things beyond their control that are much more difficult. Makes penalized on treasuries is something jonathan to what extent will the fed be backed into a corner with the sheet . They might find it difficult to back away from the issues they are addressing. They may be faced with another issue many viewers who watch somel disagree believe this is qe. If the Federal Reserve says we solved some of the issues, we will back away from some of these operations, it happens if you see the Balance Sheet go the other way again . What they do . Gregory i think it is difficult for them to get out. That goes back to the ecb experience where they felt trapped. The fed does not necessarily want to be trapped, but they are. This is not qe. It just looks and feels like qe. The difference is that there is no duration to it. There is talk in some circles about how they are going to help a funding. Jonathan diana, final word on that . Diana it trades like qe. I get your point on duration not being bought, maybe not anchoring the income, but the amount of reserves in the system is increasing. That is the qe like influx we are seeing across the board. The fed stopshich doing it jonathan our guests will be sticking with us. Coming up in the program, the highgrade bond market gearing up for a high month of sales following a slow december. That is coming up next. This is bloomberg real yield. I am jonathan ferro. This is bloomberg real yield. I would like to head to the Auction Block and begin over in europe where the market is starting to shake back to life. Three sterling offerings in the spotlight, including eib and nationwide. In u. S. , the highgrade market gearing up for 120 billion month of sales. Reinsurance group of america making up the thin pipeline that is expected to grow in the coming days and weeks. It could be a busy month for u. S. Highyield. Junk bonds are scheduled to mature. Companies will look to refinance debt while borrowing costs still remain cheap. Sticking with credit, s P Global Ratings with the most bearish debt then any point in the last decade. We saw the most downgrades it since 2000 nine. With me here in new york, greg peters and diana. Rankings parish on the of credits last year. We know the story and the price, very different. Gregory they have given companies the benefit of the doubt over the past few years. There has been a slow down and cash flow growth. You have seen that manifest itself in earnings if you are an equity player. This is a topping off, so i do not view this as a horrible trend per se. A little slow to react, as quite frankly the years prior there has been so much leverage put onto these Balance Sheets that they quite possibly did not deserve those ratings in the first place. When you jonathan when you hear things like the most downgrades since 2009, people are concerned. Should they be concerned . Gregory thats na value the pricing has to ahead of the what we will see in 2020 is more dispersion, especially among investment grade. You saw highyield last year where the triple yield did not do so well. See companiesll that are on top of deleveraging plans will be rewarded and those who do not show discipline will be punished because there is no question that it is very expensive. You do not get the kind of returns that we had last year across premuch every sector and you are not able to get that again this year without something materially changing. People should be cautious in credit just because of the entry point. Jonathan do you agree with that, greg . Gregory you should always be cautious in credit. The upside is very limited. That is very much the case in 2020, but i still think it is a pretty decent environment for credit. Pricing has definitely come a long way and a short. Of time. A lot of that though is a reversal of the prior year. I think that unless you see a and uptake in the faults companies continuing to trash your Balance Sheet. While there have been more downgrades, you have not seen Companies Look to impair their Balance Sheet. I think it is too early to sale to sell the credit rally. There is too much negativity around triple bees. Theres too much negativity around jonathan triple bees had their year in 2019, regardless of all of the concern, they had a fantastic performance. Triple cs did not until december of 2019. Are you on that bandwagon for 2020 . Gregory yes. The time to dip it was too early at the time. There has been such a big price dislocation there. There is much more value in thene bees and triple cs double bees. I see value in the capital structure at least for now. If pricing changes, then we will exit. Share thato you view, diana . Easy you have relatively conditions, there is money to be made further down the credit spectrum. For the first part of this year, it will not be really struggling, everything should be supported by the external backdrop. Then in the cycle things they are talking about are things markets have told us about for a long time autos is something they flagging as something that will need to adjust more. We have seen a a little improvement in telcos and the triple cs in the energy stock. For us you look audit added at itector by sector on a sector by sector asus. A sector by sector basis. To gregs point, if youre going to look at the areas of the market that did not do so well, is that a sector, an area you would be willing to look at and if we get some kind of stabilization, a cyclical tailwind enough to offset what our big structural issues in that particular sector . Diana it is very much on a name by name basis. When we are talking about market saturation, that is not going to go away. The sector may have gotten a boost from what the fed did that last year. Consumer credit is becoming more accessible, but it is very much on a name by name basis. Some of the triple bees autos are expected to be downgraded this year. There might be some value there where the bad news is in the price. In euro, the Balance Sheet starting point is a bit stronger there. Some of the names have been hit hard. Again very much on a name by name basis rather than a sector wide. Longterm challenges for the sector will remain with us. Jonathan final words on the auto sector, andy . Your thoughts . Gregory there are some fundamental sector ise energy going through a fundamental change in how people buy cars, how people look at cars, how they the type of cars they are buying. I mentioned europe, just looking generically at european credit, returns on european credit last year was 5 . The index yielded 50 basis points. I do not understand how people can come into 2020 they ticularly polish of you bullish view on credit. It is going to be named by name, but at least in that area where there have been some under performances, maybe there is a chance for picking some names. It is another sector in transit like energy. Gregory i think it is a fulltime to be invested in credit. It is time name by name, it is dispersion, but i think it is time for alpha. Jonathan the week ahead featuring a slew of fed speak. That conversation is coming up next. This is bloomberg real yield. Jonathan i am jonathan ferro. This is bloomberg real yield. It is time now for the final spread. Are takingpresident s center stage with john williams, fed mike chairman fed chairman as well as some factory audits. Not many factoring manufacturing numbers. Looking around the table here in new york, diana, gregory, and andrew. Looking at where we started the week and ended the week, could we be should we be worried about what is happening . Of ourthat has been one big concerns that the markets may be getting a bit ahead of their selves. Being in duration and the u. S. Makes sense because the economy is not picking up in the way that i thought the ism today was proper. When you look at the underlying data, it shows general weakness. Weeksould make next test given the markets expect a 150, 160 isnd expected. You might have to rethink the fed again. Ifan the hope is d you see it in europe, the u. S. Will lack the manufacturing recovery. It will be the last it was the last and so it will be the last out. How do we think about this issue . Gregory it is more concurrent. Europe has been caught between the u. S. And china so they should definitely react, but they are separate. Just because the u. S. Entered last does not mean also that it will not be the first either. People are a little too negative on the u. S. In terms of that. But it bears watching what todays number but it bears watching. What todays number told us is that the consumer should hold out. Jonathan lets get to the rapid fire around. Three quick answers. First question can highyield credit spread through breakthrough 300 basis points in 2020 . Yes or no. Andrew yes. Gregory no. Diana no. Jonathan will 20 20 be the year of triple cs. Diana no. Gregory no. Andrew yes. Jonathan can we retest to the 2019 lows on 10 year treasury yields . Gregory no andrew no. Diana absolutely. Gregory yes. Jonathan that is it for us. Later deck a this is bloomberg real yield this is bluebird real yield. You are watching bloomberg tv. Bloomberg real yield. You are watching bloomberg tv. Good evening, good morning, and good 2020. This is always one of the high points of the year. We will take it for what it is a surveillance special, a look a year ahead to 2020. We are always looking for someone with experience, perspective, they have been right, they have been wrong. We can do no better than this most interesting 2019 then Abby Joseph Cohen went. She is a senior strategist at goldman sachs. That barely