Record low treasury yields. They have gone to further record lows. This has been such an exceptional move. Not a good sign. Everyone is kind of getting out of its way. The bond market seems to be concerned about a recession. The bond market is telling you it is a very dark outlook. Its not just about growth, and its about the lower bound, the potential qe, potentially lower forward guidance. They will have to step up to the mark. Whether that is the right plan or not, they are going to zero. The u. S. , unfortunately, will be dragged down more toward europe. The rates market has another 25 basis points it could go. At least 25 basis points it could go. Another 25 basis points at least it could go. There are so many assumptions that are being repriced now. Be careful out there. Jonathan joining me around the table is george rusnak, oksana aronov, and gershon distenfeld. Oksana, lets begin with you. Do you remember the payrolls report . Oksana vaguely. Jonathan vaguely . Do you remember the rate cut earlier this week . How long has this week been . Oksana it has been one of the longest ones, but also one of the most exciting. If you were coming into this with a lot of dry powder, as we are, this is like christmas morning, although we are just getting warmed up. We have been getting a lot of questions around, is this the time to add risk . Im sure well talk more about this. In terms of the jobs report, it sort of seems irrelevant now, but it is great to know that we had a healthy patient coming into this. We dont know how transitory this will be, whether this is that black swan being thrown around. But it is good to know the economy is on solid footing. Jonathan you were the first person that has set around this table all week with me and described any of this price action as christmas morning. Gershon, i dont know if you share that sentiment from what you have seen throughout the week so far. Gershon i am kind of worried. Ive been doing this for 23 years, and this is the first time where nobody cared about the jobs report. I am a glass halffull type of guy, im usually a buyer of dips. A value type of investor. I am particularly worried. Because this is not a normal type of crisis. This is not where you might see Economic Growth slow down a little bit. There is a real chance Economic Activity comes to a halt. If people stop traveling, they stop congregating, you will not want to see the next set of numbers that we are going to see, and typical Monetary Policy does not work in this type of environment. You will need a huge step up on the fiscal side, and even that might not be enough. That could be very worrisome for asset prices. Jonathan georgie . George i agree with that. But i think there is another side of this that will come out. But you are right, there are supplyside disruptions, event disruptions going on, demand disruptions, and all of that will lead to revenue and growth disruptions, right . It will be longer than people think. Our view is it potentially leaks into q3, and we are going into it strong, as you said, and you eventually come out of it stronger. It will be a bumpy ride, though. Jonathan i want to talk about the treasury market. We got this monster bid of 25 basis points lower on the 30year. Not a monthly move, not a weekly move, it is a single session. Gershon, what are we pricing in here . The pace of this move has been stunning. Twoyear yields, two mondays ago, basically where the 30year is right now. And the two year yield is no a now a fraction of where was two weeks ago. What do you make of the pace . What are we modeling . Gershon i think weve been setting ourselves up for this. One thing we noticed in the marketplace even before this was, going on for about six weeks now, on days where risk markets were strong, equity markets were up, duration was not doing much. When it went the other way, equity markets selling off, duration was rallying. Even though we were in the 1. 301. 70 band on the 10 year. That was not a good sign for markets. Markets are telling you, treasury markets are telling you a clear thing. Whether we are heading for recession or a prolonged period of weak global growth, it is worrisome. It is certainly telling you that we are going to see a lot more easing, a lot more stimulus coming. Oksana i think it also raises an existential question for fixed Income Management industry, or at least for the long only part of that industry. We are cratering toward zero. It looks like we will get there. At least right now, it looks like we will get more cuts. What happens from there . The ageold formula of taking a Core Portfolio and sprinkling it with product and that portfolio zigs and zags, that does not really work so much anymore. If you look at the monster move we have had here in the u. S. , that is protected fairly ok in against the move in equities. But in europe, you have not had a monster move because those rates simply dont have anywhere to go. Going forward, traditional fixed Income Management has to really do some soulsearching in terms of what is going to be our value add here . George i completely agree with that, and i think one of the challenges we all have long careers here. One of the challenges we face is rates backing off quickly, losing value. That actually was not as big of a problem because you had a good value edge going forward. When rates go down toward zero, what you are value what proposition is becomes more challenging. Gershon your point is spot on. The odds of us going negative never say never but it is much lower in the u. S. Versus europe. There is only so much more we can rally. What is going to be that safety asset . I do also think that we should lets not all be totally negative. There was a piece of good news. I know we dont want to be overly political, but what happened in the democratic primary this week is very important for markets. And the market did react that way, i think it was wednesday. Wednesday morning. That is significant, the fact that the betting markets now have Bernie Sanders at less of a 10 chance to get the nomination. That, i think, was weighing on markets. It was looking like he would run away with it a week to 10 days ago. That has abruptly changed. That is very important. Jonathan what does that mean for treasury markets more specifically, never mind risk . I just want to get my hands around what that means for treasuries . Gershon i dont know what it means for treasury markets. We were talking before the show i was joking. In some respects, Bernie Sanders plan, if you want to if he wants to spend 60 trillion, if you can borrow at 1. 3 over 30 years, 100 years, who knows how long, if nominal growth is not going to beat 1. 3 over the next 50 years, we will have real bigtime problems. Im not sure what it means. Jonathan its been simple to construct the argument on why yields should go higher. Many people have found that quite easy over the past few years, but yields keep going lower. One thing i find fascinating, i remember bob michele was here a year ago, and he said 10 year yields in germany, the u. S. , and japan have been anchored by the policy rate. Not what you typically expect. It is not happening at the front end but further down the curve. So you look at where 10s are right now, basically where the fed funds will be by the end of the month. Look at where tens are over in germany. Basically by the depot rate for the ecb. Japan, zero, same as the policy rate. So im trying to understand whether these Central Banks can actually engineer to beat the engineer steeper curves anymore. The way the market responds to cuts is to pull the whole curve lower. Is that the story now, is that what we need to get used to . Oksana one of the things this is exposing is that Central Banks do not have the efficacy that they used to have once upon a time, and dont have control of the situation. I mean, look at powell on tuesday, 120 billion of stimulus, 50 basis points cuts, watching the dow go down by 800 points. And watching yields greater below one on the 10 year. Crater below one on the 10 year. There is very little they can do here. Yes, you are going to need more of a response from the fiscal side. Gershon i dont have much to add to that. They lost control. And the question now is what is going to be more effective . If this starts to get out of control, becomes a supply issue, not demand issue, it will make the market happy for about five minutes, as it did earlier this week. That is not going to solve anything. Do they go more unconventional policy, maybe signaling that they will be slow to raise rates on the other side of this . Actually may be more important to markets than cutting further. Jonathan what do you need to see from policymakers, outside of central bankers, to restore confidence to this market . It was a conversation i was having with larry kudlow earlier today. It seems to me they are being so reactive and being held hostage to markets. The threshold to do more is if the s p gets lower. And as much as i say that tongueincheek, it is worrying. I would rather have these policymakers lay out a set of tools and say if a Downside Risk materializes, we have this ready to go, this ready to go. If they did more of that, would you be more confident . George i would be. He alluded to the idea that he might start doing that next week. We are talking about something that happens over maybe three, six months. How do you get through that timeframe . Do you have Small Business loans, targeted policies that help businesses out in the shortterm . We think that probably comes around next week. We would have liked to have it this week, but what we got from the fed was not what the market wanted to hear. It was too fast, too much, and frankly, unbalanced. The idea of, they have action and guidance. They came up with the action of 50 basis points, which i would argue was too much. The guidance, instead of balancing that off, doubled down on that, and that spooked the market. I think that is really the problem. Jonathan if you told me 12 months ago that the market would be unhappy with a 50 basis point cut, i would not have believed you. Thats where we are at right now. Coming up, we take you to the Auction Block. That conversation is coming up next. This is bloomberg real yield. Jonathan im jonathan ferro. This is bloomberg real yield. I would like to head to the Auction Block now and kick things off in europe, the coronavirus started and ended the week with sessions of sales. Zero sales. European grade issuance falling behind 2019 the first time this year. In the u. S. , the second busiest day of the year for highgrade debt sales. Immediately followed by borrowers giving concessions nearly five times the years average. The highyield primary market grinding to a slow halt. Bounce house becoming the latest company to fall by the wayside, withdrawing plans for its 5 billion sale. I would like to stick with credit. Michael collins of pgim fixed income saying he is looking for opportunities to buy. Just now we are going to this capitulation phase, the buy the dip mentality has faded for the time being. And we are excited about that. We are looking for opportunities where people are forced sellers, where they are dumping blocks of bonds that we liked five points ago, five points lower, and that is when you are supposed to be jumping in and buying. We are chomping at the bit to start doing that. Jonathan back with us are george rusnak, oksana aronov, gershon distenfeld. Here is your moment, oksana. You said it was like christmas morning. What have you been doing . Oksana very early in the day. Very, very early in the morning. The presents are not quite out yet. And it is early if you think about highyield, it is just inching its way into the 500 spread. If you take energy out of that, which is where most of the stress is, highyield is still around 5 . 50 of the highyield market is bb, and that is helped by the duration play. So they have actually held up ok. Highyield went negative on the year just yesterday. Down barely half a percent. Again, that is the market entirely if you take energy out of that. So you have to wait here, probably for at least another couple hundred basis points. Energy will lead the default cycle. Because for them, no matter what the fed does here, it is not a liquidity problem but a solvency problem. 47 oil or 50 oil is not going to cut it. We are going to go through another cycle there. Highyield will be affected and there will be an opportunity. Jonathan it is Christmas Day but i have to wait another 200 basis points . Oksana you have to. Jonathan that doesnt sound like december, that sounds like july. Oksana depends on how fast we get there. High yield has not reacted the way equities has yet, and that is typical of highyield. High yield lags what equities do. Jonathan gershon, this is your world. You live and breathe it, usually constructive. Never an alarmist. I have to say, in all the growth scares from you, always constructive and always sensible. Where are you at right now . Gershon i will not call myself an alarmist, but i think there are two things to Pay Attention to. One, we have to get back to the old debate of relative versus absolute, and that comes to spreads versus yields. Spreads are looking more attractive, but yields generate returns. Oksana said, you have to be looking at what you buy in the market. Take energy out, take out the dicier cccs, and all of a sudden you are left with 4 . Thats not the most attractive thing in the world. The second thing, which we alluded to at the outset, this is the type of crisis that increases the left tail. It is not so much you are worried about the growth slowing, you are worried about the bottom pulling out, things grinding to a halt. Jonathan end of cycle dynamics . Gershon its not and of cycle dynamics. End of cycle dynamics would be typical end of cycle. You will start to see slowing growth, maybe a minor type of recession type of thing. We are talking about there is a real possibility all of us talking before the show, the potential for schools to close, businesses to close. We all work from home for a wild. People dont travel. We dont congregate. Economic activity slows to a halt for some period of time. That means we could see we saw the chinese pmi numbers. That could be what the Global Economy looks like. It may be a very short period of time i dont mean to sound alarmist. But i guess it is a little alarmist. The point is, we would have a huge recovery. But that is not a great environment for credit. As long as a company is ok, equity valuations can recover over time. For companies on the precipice, with a lot of leverage, that are cyclical, that could be problematic. Just like the consumer who may miss their mortgage payment. Thats why you need fiscal to step in. Jonathan the equity market is an anticipatory asset class. You are talking about getting paid. The Company Needs to pay the money. You are worried we are approaching a moment where perhaps we get into some real issues here . Gershon i am worried as we talk about late in the cycle, i have been critical of just saying cycles the whole time, but there has been leverage put on the Balance Sheets of companies that are on the cusp. If we go through a month or two of people not spending money, and seeing incredibly weak cash flow, that could be a liquidity issue. Jonathan what kind of sector are you worried about right now . I dont expect names. The Airline Sector is out there now. Gershon it is not so much a particular sector, but a sector that has been more cyclical in nature would be at the top of the list. But its just a leverage profile relying on continued cash flow. George and to your point, defaults are picking up. If you look through february, it is on the second highest level ever right now. It is february, but you are seeing defaults pick up, and you are actually seeing flows backing down. If we get funding pressures, that is where the problems start. That is where things exacerbate. If these companies dont have access to liquidity within the marketplace, that is when things start picking up and exacerbating. And from a sector perspective, you are right, it is focused on the energy market, but look at where you have supply disruptions. That could move into other sectors. Certainly could go to retail, certainly could get into technology. Once you see funding pressures happen and spilling into other sectors, that is the opportunity. It is not Christmas Day yet, but it is approaching. Gershon i want to be clear, im not advocating hiding under the desk. In fact, in our client portfolios, we are not just selling stuff and taking the risk out. All im saying is, dont think this is a tremendous buying opportunity. I am just say keep some dry powder. Im not saying even a base case that we will have a huge selloff. This is less tail out there, and you should not be going all in at this point. Oksana and i also do not think it will be specter specific sector specific. Yes, energy may lead in terms of defaults, but as we have seen before, once technicals get going, you get that recessionary pricing, irrespective of whether you have an actual recession in the sector. Flows are coming out of etfs right now, coming out of the entire etf and not any sector. Jonathan guys, great to have you with me. You will be sticking with us. Still ahead, the final spread, the week ahead, featuring a Rate Decision from Christine Lagarde and the ecb. That conversation is around the corner. This is bloomberg real yield. Jonathan im jonathan ferro. This is bloomberg real yield. Time for the final spread. Coming up over the next week, politics coming back into focus with the next round of the democratic primary elections. Plus, a slew of Global Economic data including cpi, ppi numbers from both china and the United States as well. Finally, an ecb Rate Decision followed by a News Conference with the president , Christine Lagarde. With me around the table is george rusnak, oksana aronov, gershon distenfeld. Guys, lets talk about the ecb. The fed is making a move. The meeting is coming in a couple weeks time. What do you expect to see from the governing council of the ecb . Oksana an entire 10basis point cut is coming. Jonathan thats what you would like to see or what you expect . Oksana that is what they will put on the table. I was joking before we went on the air. I said honey, rebook the , cruise, said no one ever on the back of a central bank cut. So that is not going to really do much of anything. But what we really need is, facilities need to be put in place to deal with a potentially escalating number of bad loans. Are they equipped to do it, are they prepared to do it . Has Christine Lagarde had the opportunity to do the review she needed to do to really think about all the different moving parts with our counsel . Not likely. Jonathan george . George she is in a tough spot. The market expects her to cut by 10 basis points. To your point, i dont think it is going to necessarily help that much. The question is, what do you do beyond that . Do you extend qe, make that even bigger than it is right now . I am not sure that will help. Jonathan is there a Circuit Breaker for you, gershon . Is there something a policy maker could do that would get you to sit up and say game changer . Gershon we were talking before, some leadership away from Monetary Policy. Because clearly Monetary Policy is not where the game is going to be. Maybe some leadership in what has to be done on the fiscal side. I hate to say this, but a little trumplike, actually demand that people out of your control do something. There is only so much she can do. She has to demand something be done on the fiscal side. Jonathan does that need to be in size or targeted, or smart and specific . Or just go in with size . Gershon i think size is what markets want to see, makes a nice headline. But targeted and smart will be most effective. George the market would love either, to be honest. Big size, they love targeted. But i think targeted is the smart way to do it right now, and that is where you need to do it. It is a short period of time that you just want to get through. Jonathan if you want a call option on the second half recovery lets say you are super constructive right now and you think, going to buy lottery tickets, second half, things will be better. Where would you do that right now . Gershon what action would i take right now . I think the action i would take right now, forward guidance. Jonathan from an investment perspective. What would you do . If you think the second half will be better, some people looking to take a call option on that, what part of the market when you go to to do that . Where are you going to get that outperformance . Would you buy inflation protection . Upside inflation protection . Where would you go . Gershon i would probably short duration, if i thought about it. If you really thought that this was going to be a hiccup, you are going to get a positive surprise, these levels dont make any sense. Oksana absolutely. The ferocity with which we got here will be probably somewhat similar on the way back, if this does end up being a blip. I dont think that is anyones base Case Scenario right now. But the gains can and will be taken away just as quickly. Jonathan lets get to the rapidfire round. Three quick questions. Can the 30year yield break 1 before the end of q2 . One of you, yes or no. Gershon it would be crazy to say anything other than yes. George yes. Oksana yes. Jonathan yes, yes, yes. Highyield spreads, in and around 500 basis points. What do we hit first, 350 or 650 . What do we hit first . You have to hit one of them first. Oksana 650. Gershon 650. George 650. Jonathan oh, march 18 fed meeting, 25 basis points, 50 basis points, or nothing . Oksana they are so scared. 50 basis points. George the policy is 25 but i think they will do 50. Gershon model in my head averages to 41. 37. Jonathan there we go. Ok, very specific. Great to catch up with you all. Thanks to george rusnak, oksana aronov, gershon distenfeld. From new york city, that is it for us. See you next friday, 1 00 p. M. New york time. This was bloomberg real yield. This is bloomberg tv. Kim have you ever wonderedkim how often your Smart Speaker starts listening to you every day . We put all of the speakers to the test and it is more than 10. Five things you need to know, i doubt if the worst is alexa, google or siri. The work commute got a lot easier. 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