Be hard to fight. That is putting the fed and a bit of a bind. It creates the risk of a policy mistake. If the data does not get worse. You it creates the risk of a policy mistake. Could have an economy where the second half is bouncing back. The fed is actually going to is actually going to surprise to the downside on the Balance Sheet. Is the market going to see that as the end of qe, quantitative tightening . Cuthe fed playbook is to tight and fast and signal if there is weakness. Jonathan joining me around the table is greg staples, lisa hornby, and ken monahan. Your thoughts on that, can . Is it or isnt it qe . Mr. Kashkari is tried to throw water on the idea that it is not, but even being in minneapolis, he doesnt have enough water to throw to convince the market it is not. I think the market call is correct on this. Jonathan why . I get his point, they are substituting one instrument for another. Could have an economy the way the market is looking at this, this is providing more liquidity to the market. That is driving up the price higher for rich guys. Jonathan Neel Kashkari, the minneapolis fed president wrote, someone explain how swapping one shortterm risk free instrument reserve for another risk free instrument leads to equity repricing. I dont see it. Lisa hornby. You have to look at the market and say it doesnt matter whether you believe it or not, markets have reacted to liquidity be imported by Central Banks, and this is another example. Whether Neel Kashkari wants to say it is true or not, that market has spoken for itself. We are an equity alltime highs. Selloff a fewven basis points. We are at alltime highs on equity markets. Is no forward guidance, there is no qe, but the perception of the market is the reality. The real question will come in february. Jonathan is that the point, matters . Eption if enough people think it is, that is all that matters . I think that is where we are at. We are coming off of the great 2019. This is setting the tone for 2020. Ken i think that is where we are at. I am watching the fed dots. They are in a different place from where the market is. The markets judgment is correct. The fed may be saying one thing and trying to guide in a certain way, but the market is taking its actions differently. Jonathan one crack in the Federal Reserve from robert kaplan, speaking on bloomberg. Take a listen to what he had to say. There are three aspects. Rates are lower. Then there is the perception that the bar is higher for future rate increases. The third issue is in order to address this repo issue, we have grown the Balance Sheet. All three of those actions are contributing to elevated risk asset valuations. I think we ought to be sensitive to that at the fomc. This audience for this program is incredibly sophisticated, i imagine a large portion of it will take the view of Neel Kashkari. Is there a risk of being too smart about this problem right now, if we can call it a problem . And read through what the fed is doing into broader Financial Markets . Lisa the risk is markets have become accustomed to us liquidity. Whenever the fed tries to pull it away, they create problems. We saw that at the end of 2018, beginning of last year. They had to reverse the hiking cycle. At the end of the day, growth is not change much. 2018, itrengthened came off in 2019, but we are still at 2 growth. It was a markets problem. Monetary policy cannot solve all ills of the market, and that is why they are beginning to pull the. We are conditioned to believe Central Banks will solve everything. Ofhave only 175 basis points rate cuts to go in the u. S. Before they get to zero. Whenever they try to pull back, markets react very negatively and they are forced back in. Jonathan we have been conditioned by the Central Banks who are doing this. Maybe the Federal Reserve is missing the broader picture here. There is a green light to take risk in Financial Markets. The Federal Reserve is shunning that everbright are. Effectively the message they sent is the economy this year is ok, its in a good place, and even if it gets better, we are not pulling back. But if it gets worse, we will be ready to do more. We are going to spend time talking about credit in cccs, leverage loans in the program. Is that the broader picture that you think the fed might be moment . At the they are flashing a green light to save mode up on risk. Greg i think thats what they are doing. That may not be the intended message, but thats the market the message is taking away from it. Ken the fed will have a difficult time winning the market off of this idea that there will be constant stimulus. I dont know how that will be done. Greg moment . They are flashing a green light to save mode up on risk. Im not sure that there is a better policy. What would be the alternative . As lisa pointed out, if they are more hawkish, the markets react negatively. Jonathan i dont want to talk too much about what the fed should or shouldnt do, but what it means. Treasuries have hardly moved. 1. 80 on the u. S. 10year. Here we are at 1. 80. Why . Lisa if you had asked me a couple weeks ago, i would say that we would be higher in yields, but this tells us something about the positioning and demand for treasuries in u. S. Fixed income. It is still out there. That tells you if there is a selloff, it will be muted. I think treasuries are going to run as far as they are going to run at this point. If we see improvement in growth, we are expecting some improvement in growth in europe, and the message will be that the market will adjust. Are we to go dramatically higher . No. Jonathan it is like chinese water torture, drip, drip, drip. Ok data from the u. S. Chinese data doing ok. Close outse data to the week was really terrific to what we had 12 months ago. Here we are, yields are up by a basis point. Does that make sense . I would argue it should have moved more but there is this tremendous damper on the system that is the fed. That is what you are seeing. Greg should have moved more but there is this tremendous damper on the system that is the fed. Still supporting with 20 doing euros on their rent. It seems like the market consensus is the fed is out for 2020. That leaves you with the 10year at 1. 80. I dont see anything breaking us out of here. Jonathan we have to talk about the treasury, 20year issue coming to the market. My question is whether the average duration is being pushed out, or whether they take some out and put it into the 20, rob some from elsewhere. How do you see the average duration of the treasury . Lisa it would be smart to increase the duration given how low yields are. In the near term, they may do some tweaks because they dont need of funding this year, but they will need it next year. One of the do this you will be temporary just to get the issue well absorbed. Next year, we will see normal option sizes. This will be a consistent part of the curve for as long as we are in markets. Jonathan still supporting with0 doing euros on their was that ar a steeper curve . Lisa i believe it was. I have been on this show talking about this topic. I think they could do log or debt at this point. It will be bought, there is demand. But i believe the treasury and the fed and Central Banks around the world want steeper curves. They realize what happens when the market gets into an inverter how bad itrve cycle, is for future growth prospects. They are doing everything they can. Buying bills is one thing they can do. Issuing a 20year is something they can do. All tweaks at the margin, but curves are flat, why not. Greg you talk about liability driven investments. It will be accepted in the marketplace. Ken. Han final word, ken go long. Jonathan short and sweet. Coming up on the program, the Auction Block. European debt raging on with another breaking week of sales. That is coming up next. This is bloomberg real yield. Jonathan im jonathan ferro. This is bloomberg real yield. I want to head to the Auction Block and kick things off in europe. The primary market had a record month insight. Sales of another 50 billion euros to top the january high. Demand for sovereign debt in italy and spain, receiving record amounts. The united states, the persistent bid for investmentgrade debt continuing. High great sales of 35 billion topping sales with more than two times oversubscribed. Some investors growing increasingly cautious following a stellar year of returns. Kkr cutting its weakest investmentgrade debt, writing the Macro Economic and geopolitical environment could trigger a wave of pollen angels or investmentgrade credit falling back into the highyield category over the next 12 to 18 months. Colin martin pushing back a little bit. More than half of the market comprised of bbbs, there is no stigma. They are ok with that. They believe they have the tools to defend that if need be. With yield solo everywhere, they are ok with bbbs. If you have been an investmentgrade Corporate Bond investor, that is a highgrade. Still risky when you are taking on more risk today that you were 10, 20, 30 years ago. Jonathan lets get thoughts from the guys. Ken, in credit, bbb is at the moment, the story coming in from 19, the narrative that builds is d. C. Suite could defend their credit rating. Does that still count . Ken i do. We saw something for the first time in my 30plus year career. We saw at t, the people concerned about being downgraded to below bbb to highyield, its board of directors put in something into its management compensation scheme, where management is being judged partly by its ability to keep debt below a certain level. The reason for that is the board is cognizant of the fact that a reduction in rating for at t in the highyield would killed stock. The board has done something to protect itself. I think youll see more and more of that. Are there going to be no angels whatsoever in 2020 . No. There will be a number of them. Direill the results be as as some of the prognosticators are predicting, like our friends at kkr . I think thats an overly conservative call. Jonathan the reason i find this call compelling is the call on policy, and to point out within investment grade, within bbb, health care and energy make up a decent slice of the pie. You are asked those to a change in policy. If the long trade last year was being long on the sea suite running their hands around issues, and health care and energy, you are exposed to things you cannot control. The argument being, as the politics come into sharper focus, particularly on the left, whether that will be a problem for this credit market, lisa. Lisa i am cautious on credit. You are playing for a handful of basis points. It is not like where we started one year ago. I think there are opportunities in certain bbbs. At t is a great example, there are a number of others. They are doing the right things in terms of deleveraging. We actually saw palin ratios in bbb is coming down last year. Whereas singlea rated companies are paying out to shareholders. Changes. That is something we are cognizant of as we go through the year. What you have to think about is not the president ial part of the election but congress. If the democrats were to win the white house, you have to have a call that the democrats will win the senate as well, which seems less likely to happen at this juncture, to get meaningful policy change done that would impact the sectors. Greg bbbs are now trading were singlea was a year ago. Highyield has gone 200 basis points. Everything has tightened. Only a quarter of the market. Are there subsectors that will be at risk . Absolutely. Two broad brush the entire bbb marketplace, i dont think so. Jonathan some big calls coming in at the back end of last year to rotate to the junk yes of junk. Pgim was one of those that did that. Big rally through december, nice followthrough in 2020. What should you do now, especially if you made that rotation . This is kathy jones weighing in. We dont like the ccc area. The reason is, you have to have this low liquidity and turnover in refinancing in those companies. After the big rally, anything that gets in the way of that could cause some real problems in the sectors. Jonathan ken, your thoughts . Ken you have seen a rally, and you had an enormous lag until december. Ccc slacked and then have continued, outpacing highyield so far this year. Having said that, i think this is an overly conservative prediction. At the ccc market in particular, there is a large portion that is energyrelated. She is correct, a large number of those Companies Need access to the Capital Markets to survive. Space, theres also an anonymous number of companies that have idiosyncratic risk. You have to look at those individually rather than say all cccs have too much risk or refinancing risk, we will ignore them. Jonathan everyone always think they hold the good ones. I have the good ones. It will be ok. I will get out when i need to get out. Is there a big Liquidity Risk . Ken that is a broader question as it relates to the highyield market, as to whether be could be in a state where there is Liquidity Risk. We are mindful that you have to manage or liquidity. Jonathan everyone around the has said this is qe. People screaming at the tv saying it is not, but you think it is. If the fed backs away from its Balance Sheet and a couple ,onths halfway through the year and youre sitting on a ccc credit and the market source to tighten up, or spreads got blowout, not a good place to be, is it . if you are owning a ccc jonathan can you say this rally is built on the Balance Sheet expansion of the fed because of qe, and have the confidence to be in the riskiest parts of credit, when what youre telling me is that this rally is built on Federal Reserve stimulus and pretty much nothing else . Can you have that trade on . If your framework is this is a cutie trade and the fed is telling you it is not, and there that the Balance Sheet expansion ends, do you want to be sitting on that credit . Ken the answer to that question is you are right, the fed is supporting the broader rally taking place in the marketplace. That doesnt mean that i cannot alect granted, as portfolio manager, you think you are selecting the best. We are very focused and confident in our credit selection skills. I look at what propelled us forward in terms of returns last year. It all came from credit selection. Jonathan i dont want to question anyones homework around the table, but you have made argument to me that this rally was built on fundamentals, better fundamentals, and you wanted to own the riskiest of risk, loans, ccc is, whatever, because it was built on better fundamentals. I would sit here and say that makes sense. But if you are telling me the rally is built on qe and Balance Sheet expansion, i struggle to get my hands around that. Ken arent we seeing evidence of improvement elsewhere, in europe . Arent we seeing evidence of improvement in china . Wouldnt we expect exports to well . Ially increase as there are some things beyond the fed holding this altogether. Jonathan still ahead, the week ahead, featuring a slew of Central Bank Rate decisions. That is coming up next. This is bloomberg real yield. Jonathan from new york city for our audience worldwide, im jonathan ferro. This is bloomberg real yield. Next week, aer the lot of things happening, including the kickoff of da vos, the World Economic forum in switzerland. Ecb in thursday. What are you looking for . Lisa not a whole lot, to be honest. I think it will be pretty dull. I think lagarde is coming in with this notion that fiscal needs to take over. Monetary has done as much as it can do. I dont think markets are expecting very much, to be honest. I cannot disagree with that. Greg absolutely, ecb will be a snooze. If bcel question is does something. Jonathan is the pressure building on Christine Lagarde to defend where Monetary Policy is right now, defend the concept of negative Interest Rates . Lisa bce does something. Jonathan is the pressure building on christine i think sr amount of support as super mario left picture, made it clear the policy that the ecb has followed has been the right one. He also brought up the message that we can only do so much lifting. Needs to happen next is the fiscal side of things. We have not seen that. We have to get germany to get off the dime on that and make moves in the right direction. Jonathan is that going to happen anytime soon . Ken we have not seen that. I dont think so. Lisa things have to get significantly worse before we see a real move on the fiscal side. Greg i have strong connections in germany and the consensus is it a going to happen. Jonathan some people on this side of the atlantic think it is going to happen. Lets get to the rapidfire around. Three quick questions, three quick answers. First question, is it qe, or isnt it qe . I know where we stand on this now. Lisa qe. Greg perception is reality. Qe. Lisa qe ken qe. Jonathan 20 years security coming out of the treasury. Does it lead to a steeper yield curve, yes or no . Greg yes. Lisa yes. Ken yes. Jonathan big rally in highyield through last year. Spelling over to cccs from december into 2020. Do you stick with the ccc rally . For anyone that in december. Ve do you stick with ccc or start to fade the rally . Stick with it or fade . Greg fade it. In december. Do you stick with ccc or start ken stick with it for the first half of the year. Lisa get out. Jonathan great to catch up with all of you guys. That does it for me. We will see you next friday, 1 00 new york time, 6 00 in london. This was bloomberg real yield. Ken this is this is bloomberg. This is bloomberg. Mark im Mark Crumpton with bloomberg first word news. President trump has named constitutional lawyer Alan Dershowitz to represent him in the Senate Impeachment trial. Dershowitz confirms he will be making oral arguments. The president also added former whitewater prosecutors ken starr and robert ray to his team. Starrnt counsel for the investigation and ultimately lead to bill clintons impeachment in 1998. In ukraine, Volodymyr Zelensky has rejected the Prime Ministers resignation. The Prime Minister offered to step down after leaked audio recordings suggested he had criticized the president. Will give thes he Prime Minister another chance and that it is not time to shake the country politically. Canada will give 25,000 to each of the canadians who died when iran shot down a ukrainian passenger jet last week. Prime minister Justin Trudeau says the money, which could top 2 million in total, is intended to cover the cost of funeral arrangements or travel. The Prime Minister also stressed the expects iran to compensate the families but a