>> negative interest rates. >> the side effects become important. >> you'll have asset bubbles. >> the marginal medicine has side effects. >> you want to ride that wave while it's happening. -- rates, negative or not to stay low. >> keep your eyes wide open for when there's a correction. >> in the medium-term, this cannot be the way that you manage a real economy. lisa: banks don't like negative rates. joining us around the table in new york is guy lebas, mark lindbloom, and sam dunlap. mark, negative rates. are they going away anytime soon? mark: probably not. however, a lot of the press we are seeing here, negative rates and what a bad thing they are, it is not as if central banks around the world and particular the ecb asked for that. their main mandate is inflation and economic growth. they are responding to that. secondly, there's a lot of optimism around the world right now, a goldilocks situation. we have seen a bit of a change in that recently. there is room for downside there. that growth is yet to come. we think the prudent measures of the ecb and others are justified. third point we would make is, the folks arguing this is a bad thing, you have to look at the opposite and say what if this the worldpened, would and europe in particular be a better place? while we don't like it as much as others, we think it's not a place to be invested, we think they are sticking with their mandate. lisa: you like negative rates? sam: i agree in the sense that it was definitely better than the alternative post crisis. a depression-like outcome would not have been a good solution. the ecb's position toward negative rates in this year-long pause that lagarde has been clear on as they rethink some of these policy issues, negative rates are on the table to perhaps end. it has certainly punished european banks. i think u.s. banks have been a star performer in the post crisis period. negative rates sound great in theory but they actually hurt the transmission mechanism of the european economy. i think it would be prudent that they stop and end the negative rate policy in the medium term. lisa: two things going on. perhaps a problem with banks, transmission mechanism that may have been negative. as far as helping to boost inflation and growth, a positive. the question that was raised by some of those interviewed in davos, has there been a bubble created as a result of some of these measures? guy: i don't think risk asset valuations in europe are particularly rich. as the ecb has influenced risk asset valuations, it doesn't seem to be bubblicious. we kept focusing on the banking system. there is a real dichotomy between how negative rates seem to affect real economies and financial economies. if you look in regions that have very low competition in the banking sector such as scandinavia, that have instituted negative interest rates, they have less negative side effects of those negative rates. using the word negative too many times in that sentence, but you get the idea. in the eurozone, you have greater banking competition, 50 or so decent-sized banks. that is were the problem emerges with negative rates. lisa: so if you can offset some of the negatives, you can end up with a net benefit without the distraction. guy: my guess is the less competitiveness of the banking system in scandinavian regions means banks can charge wider spreads on loans and make up for those problems. lisa: meanwhile, we are talking about european risk assets. how much are the low rates in europe fueling some kind of flight to the u.s.? i'm watching the gap between u.s. and german 2-year bond yields. it has shrunk to the narrowest since 2017. i wonder how much this is evidence of european investors flooding into the u.s. to take advantage of that extra yield, pushing yields down here. what do you think, mark? mark: no doubt there is a tremendous amount of savings around the globe. we have seen that from all of our offices around the globe, inflows from asia, europe, around the world, into the u.s. as the high-yielding country of the world. that has certainly been a key factor with recent inflows and the support of bond markets. the other side of that is, we get back to this idea of growth and inflation, and the central banks, the ecb is doing the right thing. growth is ok, not great. there is a lot of optimism. there could be softness, but we know that the guiding light has been this low inflation. with inflation where it is, it seems wise to us that people buy bonds because inflation is low, or as a diversifier to their global portfolios. sam: no doubt the low yields are giving the u.s. attention, but i will also argue the investor euphoria created on the heels of the recent fed balance sheet and fund flows are driving fixed income performance and lower yields, despite the turn in the macro data. the macro data is looking to be a bit brighter as global pmi's look to be reversing. a lot of our clients are looking for high-quality, stable income, but cautious on the long end. there could be pressure if the data surprises to the upside, or the inflation data begins to turn. lisa: what do you think of the idea that foreign investors are increasingly coming to the united states? is that what we are seeing on a day like today? you see yields on two-year and 10 year the lowest since october. guy: no. one of the big changes in financial markets over the last seven, eight years is that foreign financial institutions buying outside of their home currency bonds essentially have to hedge foreign-exchange rates. the cost of those hedges right now more than overwhelms the yield differential in many cases. one of the biggest funders in the u.s. treasury markets of budget deficits over the last decade or so are not participating heavily. that is one reason why you see u.s. banks buying a huge amount of treasuries. we only have data through the third quarter of 2019, but the preceding year leading into that, u.s. banks, big banks in the u.s. bought $254 billion of treasuries net. they are funding one quarter of the u.s. budget deficit because foreigners are not buying. the yield differential looks large. once you take into account the foreign-exchange market, it is not. lisa: taking a step back, given that you are pointing to the shift from foreign demand to domestic demand, i wonder how much the fed is fueling this with their repo facilities. they say it doesn't count, it's quantitative easing. how much of that is really going on? mark: the federal reserve has been concerned about the reserves on the system. we think they have done a good job maintaining the fed funds level between 1.5 and 1.75. that is the stated target. we are not so concerned about them continuing to accomplish that. there was a big scare at the end of the year with the level of reserves, what we may see rates do over the term. we thought they did a good job getting in front of that. we see them continuing to provide reserves, whether that is a continuation of buying bills, repos, or some combination, we are not concerned. we don't think it has been driving a lot of inflows into the treasury market. it is supportive, though, of the treasury market. lisa: do you agree, sam, that this is supportive, but not qe? sam: think it is very supportive. the debate about whether it is qe or not, the balance sheet expansion is undeniable. whether you want to call it qe or term repo, it is what it is. the key is the fed is committed to expanding the balance sheet, along with the powell pivot, which fueled fixed income performance in 2019. then you have the term repo at the end of 2019 which further fueled the rally we saw in traditional fixed income. that spilled into 2020. it's very important that the fed is expanding the balance sheet. they had a midcycle easing campaign long before we had a recession. that is positive for risk assets. that is why you are seeing the global macro data turn here. lisa: do you agree it's been supportive of risk assets? guy: i said no last time, so this time i have to say yes. anytime you have a liquidity release like this it is helpful, but what has offset a lot of the fed liquidity release has been a buildup in the treasury general account. lisa: we could have a three-part series on the tga. everyone sticking with us. coming up, the auction block. the european bond markets starting the year in record fashion. that conversation is coming up next. this is bloomberg "real yield." ♪ ♪ lisa: i'm lisa abramowicz. this is bloomberg "real yield." i want to head to the auction block. let's begin in europe, where one of the riskiest corners of the bond market is enjoying its busiest january ever. junk rated borrowers running up 7 billion in euros this week, putting monthly sales close to the 10 billion mark. monster demand keeping u.s. investment grade issuers busy with close to $20 billion this week. adobe boosting the monthly slide to over $118 billion. staying in the u.s., where the junk-bond market priced eight deals on thursday alone. monthly issuance topping $30 billion, the most for any january in more than a decade. guggenheim warning about the impact of loose monetary policy on debt. >> when you look at the amount of leverage in corporate america and where we are today, you definitely are inflating a bubble here in credit. lisa: guy lebas, mark lindbloom, and sam dunlap are still with us. i have to say, guy, i'm looking at yields, the bond yields are near their lowest ever. certainly if you look at the top tier of junk bonds. is this looking a little frothy? guy: spreads are tight. as you pointed out. what we tend to see in a high-yield market is that spreads can remain tight for a long time. they spend most of their life in the bottom quartile of tightness and then every so often explode higher based on outside catalyst. yes, they are tight. they will probably remain absent any outside catalyst. but that is a pretty lousy risk reward proposition, particularly if you're an investor in individual securities as opposed to more liquid vehicles like etf's where you can exit faster. lisa: sam, agree? sam: we agree credit spreads are historically tight. some concerns in corporate credit that scott pointed out. the increased leverage we have seen post crisis in corporate america, some of those fundamentals from a high-level appear to be a concern. it is worth noting, if you look back to 2019, bbb corporates, one of the most disdained asset classes on the planet going into the year. the powell pivot, balance sheet expansion, certainly fueled an excellent year for bbb corporates. the balance sheet expansion and the accommodative fed policy is helping those asset classes. i think the onus is on market participants to look at other areas of high quality credit. credit spreads can remain stable. there are improving areas in u.s. credit, residential mortgage, for example. lisa: which you specialize and invest in. sam: that's an area that is improving postcrisis. there are unique opportunities. i think you have to be cautious toward areas that have a lot of interest rate sensitivity. interest rate sensitivity could hurt those longer run performance numbers. lisa: it has been a theme i've been hearing. not a great risk reward risk -- not a great risk-reward proposition. it is not going to collapse. we talk about high-yield bonds. are you just avoiding it, being selective? do you agree with that thesis? mark: for bond guys, we are pretty optimistic. we think the economy will be ok. around 2.25. lisa: that is a bond person being optimistic. we think the economy will be ok. mark: we are a gloomy bunch. earnings coming in ok. given all of that, however, we don't think it will be another 2019, which was spectacular, no matter how you look at it. hard to find things that went down in 2019. we think this year will be much more selective. sort of a bond pickers market, if you will. what we've been doing based on that is reducing below investment grade pricing -- grade quite significantly, given the risk reward we are talking about. similar in european. however, where we do find value are things like bank loans, which have not been doing well. clo's have been bloodied in the last couple months. lisa: when did you start the shift? mark: fourth quarter, particularly november. they were having a hard period of time. they have to be careful in picking those names in the primary and secondary market, but we see much better value there. the other area we have not talked about where we feel there is a lot of value -- the name of the show is real yield -- emerging markets. those are the three where we are being very selective, unlike last year where many sectors were doing well. lisa: how much is contingent on the dollar weakening? mark: it depends on dollar issuance and local bonds. we are about half-and-half in our domestic market portfolios. we do think this year will be better for the local bonds as well as those currencies, if those fundamentals hold up the way we think they will in 2020. lisa: do you think clo's hold a better risk-reward right now? guy: since we are sticking to one word answers, no. lisa: great. guy: joking aside. the underlying fundamentals of that asset class in the aggregate are far better than they were in 2007, the last time we were super tight credit spreads. liquidity and underlying names are much better. there is a lot of data to support that. i'm not worried about the underlying credit metrics of the loan market. what i'm worried about is there has been a noted deterioration in the strength of the hands of the holders. it used to be a very heavily private investor supported market. you see people like kkr rotate out of the market, and you see increasing entities like mutual funds on the margin fund that. they are sensitive to inflows and outflows. it is not the fundamental credit quality that concerns me. it is the holders and the itchiness of their trigger finger relative to the liquidity in the market. lisa: i'm looking now at a moody's report that came out today, taking a look at loan covenants and how they steadily weakened through the year. how much is this a concern on a broader level? i know you focus on credit where people have been worried about underwriting standards. have you seen those weaken as well, have those been persistently strong postcrisis? sam: residential underwriting standards has been persistently strong. i don't know if anybody has gotten a mortgage lately, but it is a robust process. lisa: it's a pain in the neck. sam: it is. that's on the heels of dodd-frank in the qualified mortgage rules and the requirement to calculate the borrower ability to repay. you are seeing a paradigm shift in residential mortgage credit underwriting postcrisis, whether it is agency or nonagency. the underlying collateral and the integrity of the process is completely different. that is why we have seen improving credit fundamentals. not only has the underwriting improved dramatically but you have seen the collateral, u.s. homes have been steadily rising postcrisis, thanks to the fed's reflationary campaign. lisa: everyone is sticking with us. still ahead, the final spread and the week ahead featuring the fed's first rate decision of the new year. everyone expects them to be on hold. we will talk about whether that could change later in the year. that is next. this is bloomberg "real yield." ♪ ♪ lisa: i'm lisa abramowicz. this is bloomberg "real yield." time for the final spread. coming up over the next week, on monday, new u.s. home sales, durable goods, and consumer confidence on tuesday. fed rate decision on wednesday. then it is the bank of england on thursday. plus, u.s. gdp. guy lebas, mark lindbloom, and sam dunlap are still with us. interesting to see how going forward, we will be looking at what is going on with central banks, and everyone expects them to stay put. is there anything that could change that? do you think the fed could cut by the end of the year? mark: it's possible. we don't expect them to do anything in 2020, but more likely a cut than increase. i think it's a very high bar for them to increase interest rates this year. based upon what chairman powell has said in terms of higher and persistent inflation, even if we saw stronger growth and inflation percolating toward 2%, we don't think they are likely to move quickly. our high probability thought is they do nothing in 2020. sam: completely agree with everything mark said. i would just underscore the point that he made about seeing persistently high inflation before the fed actually tightens. that is really important for market participants as we look ahead. the fed wants to see very high inflation, in my view, to run things much hotter than where they've been post crisis. they have been persistently below their target rate throughout the post crisis period. this balance sheet expansion, along with the midcycle easing campaign, they will get there, over time. guy: two or three cuts, largely in the middle of the year, driven by market plumbing problems. the same as the repo mayhem we had in september. but that is not why they will cut. lisa: interesting. no, no, two or three more cuts. time for the rapidfire round. three quick answers. quick is the key. which will we be seeing next, 10-year treasury yields at 2% or 1%? guy: neither. lisa: you have to pick one. guy: 1%. sam: 2. mark: 2. lisa: ccc rated debt, buy or sell? guy: buy. mark: sell. sam: buy. lisa: which do you prefer over the next six months, high or investment-grade debt? >> investment-grade. >> high-yield. >> investment-grade. lisa: guy lebas, mark lindbloom, sam dunlap, thank you so much. buy ccc potentially as risk on continues. from new york, that does it for us. jonathan will be returning next friday. from new york, this is bloomberg "real yield." ♪ and they lived happily ever after. the end. the end might not be as happy as you think. after all, 4 out of 5 people who have a stroke, their first symptom is a stroke! but the good news is you can rewrite your ending and get screened for stroke and cardiovascular disease. life line screening is the easy and affordable way to make you aware of undetected health problems before they hurt you. we use ultrasound technology to literally look inside your arteries for plaque that builds up as you age- and increases your risk for stroke and heart disease. so if you're over 40, call to schedule an appointment for five painless screenings that go beyond annual checkups. and if you call us today, you'll only pay $149-an over 50% savings. read it again, papa? sure. i've got plenty of time. life line screening. the power of prevention. call now to learn more. >> you're watching the "best of bloomberg daybreak: middle east" major stories driving headlines this week. >> oil juntas widening tensions in the middle east and africa halt output and exports from key opec producers of rock and libya. -- iraq and libya. unavoidable?lt region'sceo of a largest letter says he's looking abroad for expansion. here our exclusive interview with the head of the national bank from qatar. >>