>> confirmed that the u.s. economy is in a good spot. >> absolutely. the u.s. is clearly the bright spot in the world. >> the u.s. economy is in good shape. >> we have to take into account what is happening in the rest of the world. >> it will be interesting to see if the effects of the coronavirus eventually come to our shores. >> something like 70% of the industrial production is still shut in china. we don't know when it comes back on. >> global growth takes a hit if china takes a hit. >> i think the markets may be range bound as we get through this. jonathan: joining me around the table here in new york is bob michele of j.p. morgan, priya misra of td securities, and matthew hornbach of morgan stanley. great jobs report with a big caveat. a big asterisk. all of this data for the month of january predates the scare coming out of china. how much can we read into this? priya: i think the jobs report is actually not that important. it is always a backward looking indicator. plus, we had this pretty big coronavirus shock. we actually don't know how long it will last, what is impact on china. i would argue, looking at the impact on china and on the u.s. today, it is much higher than it was with sars. the report told us the labor market was chugging along as of january. that does not mean a lot. that is why the treasury market pretty much ignored it. jonathan: we pretty much did ignore it. treasury yields now as i look at them are down six basis points. 158 on a u.s. 10 year. it is as if the payrolls report never happened. matthew: this reminds me a lot of 2014. in 2014, u.s. economic data was outperforming almost the entire year and what happened to treasury yields? they went down, down, down. if you look at why that happened, it was because overseas investors bought a tremendous number of treasuries in 2014 because yields outside of the u.s. were minuscule. it is the same thing. this is what is going on. people are coming to the u.s. because you get high quality, high growth, high yield. jonathan: this is a big story. the united states and the u.s. economy to some degree can decouple from the rest of the world to some degree. the treasury market cannot. are we seeing that play out again? bob: we absolutely are seeing it play out. i was in europe last week. the u.s. this week. everywhere i go, clients have too much cash. they are looking for reasons to get into the bond market. if they are in markets with negative yields, they are trying to find that thing in the u.s. which gets them to jump in. i think the market is doing the right thing today. the employment report, fun to look at -- pointless in the wake of the coronavirus. right now, people are taking out a little protection against what could happen over the weekend. jonathan: talk to me about the range on the 10-year right now. in or around 160 right now. what kind of range are you thinking about for the next few months? bob: the fed is telling us they do not want to change the fed funds rate. i think the 10-year will be in tagging distance of 150 to 175. in a risk-on environment, like we had a month or so ago, 175 to 190. in a risk off environment, you are going to be maybe down to 150, 140. that is it for the first half of the year. priya: i completely agree with bob. the upside is a little more capped than the downside. just because we do not know the impact. so can be 10-year get much below 150? possibly. if indeed the fed is starting to cut rates, they can go a lot more. the upside, the fed essentially told us we have your back if financial conditions tighten, if the u.s. economy slows down. but if things are actually ok, we will let it run. jonathan: the signal from the bond market right now is we believe you, you will keep rates low. we don't believe you can generate inflation. that is the signal i am getting. is that the signal you see? matthew: absolutely. the 10-year breakeven inflation rates cannot get out of bed. they have had good reason to try. we will have decent base effects pushing up the rate of year on year inflation into the first quarter of the year and the bond market does not seem to care. the one thing that stood out to me today is in the monetary policy report from the fed acknowledged the possible downside risk of the coronavirus. this is just another element that will weigh on people's thinking when they decide what to do with their cash. treasuries is the safest place to be if the risk continues. jonathan: momentum has to matter here. you look at the rest of europe and the rest of asia right now. the u.s. at least has positive forward momentum for january. if you look at december for the likes of germany, we are talking about recession risk still in europe. there is a massive problem right now for the ecb, isn't there, bob? bob: people looked at the data coming out of germany this morning, and it was horrific. it was sort of back to the crisis era levels. that is problematic. if you don't see yields going up and you are stuck in negative territory, you are coming into the u.s. market. i think there are a lot of other reasons yields are staying low in the u.s. the problems have not gone away. we see all the campaigning now, where we had the iowa caucus, we have the new hampshire primary. people are getting a little anxious about how all of this will play out in a general election. brexit has not gone away. and what is a phase ii deal going to look like with china now that they are mired with the coronavirus? jonathan: the debate of 2019 has not gone away, either. we have repeated it so many times it has almost got boring. manufacturing. services are resilient. we have not solved that dilemma yet, have we? we thought we would come in this year and we would see manufacturing picking up. then we got punched in the face by a growth scare again. priya: i think there was an assumption -- there probably still is an assumption that manufacturing was weak because of the trade war. the fact we got a phase one trade deal, i think people started to feel, ok, manufacturing can start to move up. that is not happening in europe. i would argue that will largely stay weak. then you look at the profit margins story. profit margins for the u.s. corporate sector has been declining for the last couple of years. it has actually intensified. i'm concerned the profit margin story will weigh on the service sector. bob: but can china deliver on its side of the phase one agreement? it does not look like they can. they've shut down the country. priya: right, so even if they can't deliver on the phase one deal, does the president reinstate tariffs? i think highly unlikely. is idea of more tariffs probably behind us, but that doesn't mean the business uncertainty goes away. as you highlighted, the election is right there. business uncertainty stays high. profit margins. at what point does the corporate sector say maybe we need to cut down on hiring as well? jonathan: you think that risk is the economy slows dramatically enough for the fed to get in? not just about the outlook and the balance of risk, you think the hard data in the u.s. is about to rollover at some point this year? priya: yes, we argued which is actually why we have the fed easing later this year as well. it could take a while. the labor market is still strong, as we saw today. but we are really concerned that if there is no let up in uncertainty, no let up in the global growth drag, the u.s. corporate sector cannot do this alone. which is why it will ultimately spill over into consumption in the hiring channel. matthew: if that were the case, i would want to see it show up in measures of ceo confidence and small business optimism. and we just are not seeing that yet. these measures are actually bouncing. they are not back at the pre-u.s.-china trade conflict levels, but they are heading in that direction. they might not continue in that direction, but i would want to see those pivot lower again before i started to get more concerned about the u.s. economy. bob: we are funding their complacency. they are able to issue whatever they want in the corporate bond market at ridiculously low levels to service the debt. and they are using that to buy back shares and raise dividends and maybe even buy each other. why wouldn't you be a happy ceo with that environment? jonathan: any policy initiatives on the horizon? because this has been a really, really policy driven market for many, many years now. are there any policy initiatives on the horizon you can see that changes the dynamic we are discussing around this table? from china, from europe, from the fed, from the u.s.? bob: i do not see it. i think central banks want to stay where they are. provide the accommodation. i think what changes the dynamics is to see a fiscal impulse come out of somewhere. i don't see who has the courage, the capability, or the ability to do that. jonathan: do you see that? matthew: when i look around the world at the central banks that have been opining on policy and the risks around their outlooks since january 1, i can't find one central bank that really wants to cut rates aggressively, nor can i find a central bank that wants to talk in more hawkish tones. they just want us all to believe they are on hold for the foreseeable future. that is why you don't get volatility in these marketplaces. jonathan: do you believe them? matthew: for now, yes, i do believe them. fx vol is at all-time lows on our implied metrics. there is not much going on right now. jonathan: if you want to put capital to work, what do you do? is there an inflation call option that you would like to take at the moment, given no one is pricing in higher inflation? what do you do right now? priya: i think you put on steepeners. because the market is not pricing in the fed easing or inflation risk premium going higher. the fed is going to conclude its inflation framework review by the middle of the year. we think they will push on the theme they will let the economy run hot. so the front end will be absolutely anchored. meanwhile, the u.s. treasury is issuing 10 years. i think you put on a steepener. jonathan: do you like that trade? matthew: we like another version of a steepening trade. but it's because we think there are asymmetries with respect to how worse things can get or things get better. if things can get better, the yield curve steepens a touch. if things get dramatically worse, we can see the front end of the curve bring the fed into play. but we still have more of a risk off mentality in the recommendations we have for our investor base. we think that there is more to go on the risk off. bob: i am all in. i don't want to fight this. there is too much liquidity looking to get into the bond market. i want to get into emerging market debt. i think when the fear over coronavirus subsides, you have central banks that have capacity to bring yields down a lot. you've got high real yield and fx that can kick in in a big way. jonathan: bob michele is all in. that is a shift. the guys around the table speaking with us. coming up, the auction block. issuers jumping back in. that conversation is next. this is "bloomberg real yield." ♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i would like to head to the auction block and start things off right here in the united states. investor appetite was on full display with companies boosting deal sizes and weekly ip issuance. topping the high range of estimates. sales of high-yield debt heading for its second busiest week of the year with roughly $14 billion of bonds priced in multiple times over subscribed. in europe, lvmh closing the biggest corporate bond deal since 2016. pricing 9.3 billion euros of bonds. two of the euro tranches placed at negative yields. sticking with credit, blackrock seeing headwinds to investing in high-yield. >> the credit markets today are challenging. a great call on ccc's. i think you have to be tactical around that. you get in, you have got to get out of it. because of liquidity in the high-yield market. liquidity down the credit spectrum is really tough. we are all in, we're all-out, and you cannot trade that much. jonathan: back with us, bob michele, matthew hornbach, and priya misra. bob michele is back here. -- back in. let's talk about the shift in high-yield. you are leaning into this? bob: yeah. i don't want to fight this. if you go back to the middle of last year, it looked like we were headed towards recession. the central banks eased en masse. we totaled 88 central bank rate cuts totaling 9000 basis points. you got compromise on trade. so what is there to fight? and i look at it from the perspective, you worry about high-yield. if you think you are going to lose money. to lose money, you need default rates to go up. default rates go up when you have a recession. if the probability of recession is reduced so dramatically, why do i want to fight that? i'm not going to have default rates, i will not lose money, and i have got loads of clients around the planet looking to get into something that has a positive yield. jonathan: summer of last year, this was a 180. you were worried. you were worried about the end of psychodynamics bleeding into fixed income -- it did not happen. what was the inflection point for you? what was the moment you realized we need to lean into this and turn the other way? bob: shock and awe from the central banks. the overwhelming ease providing liquidity backdrop and expansion of the balance sheets again. for me, that was the inflection point and then a compromise on trade was a nice tailwind to all of that. priya: the fed reaction point is critical here. it is interesting -- the fed was highly divided when they actually cut rates. and yet, even all of those fed officials that did not actually want to cut rates are not talking about hiking now. so the fed is entirely behind this on hold we will ease if we need to, but the balance sheet is growing. i'm concerned about growth here, but not necessarily over the next few months. i think credit is ok for now, but i would say hedging some of that liquidity risk might make sense. hedging some of that default risk in effectively long dated treasuries. matthew: i would say you had two things happened last year that was shock and awe for me. one was the ecb. massive easing. if you look at some of the shadow short rate measures of what the ecb did, they had a tremendous amount of impact on the market by flattening the bund curve. and then number two, the fed cut interest rates 75 basis points. yes, somewhat reluctantly, but they told us once the uncertainty went away, they were not going to take the 75 basis points back from us. that is a gift. that was a gift and i think to me, that explained the risk on in the fourth quarter much more so than the balance sheet expansion. jonathan: you talked about the asymmetric risk around the fed's decision set for the rest of this year, tilted more toward rate cuts than rate hikes. that is the additional layer on top of the big banks from last year. matthew: absolutely. when i look at what is priced into the front end the curve, we have about 1.5 rate cuts in the price for this year. that does not stand out to me as being egregious. i can easily see that going to three rate cuts this year if things really deteriorate. that is not what i'm expecting, but it can happen. jonathan: from the credit perspective, let's talk about the price of that story. we are rich. we could have said that many times over the last few years for sure. when lvmh came into the market and issued trenches of debt with negative yields as they make an acquisition, is that something you want to be on the others of? -- other side of, bob? bob: i think you are looking at tired, old, antiquated metrics of default, risk premium, yields, credit spreads. jonathan: are they antiquated? bob: there is a new world of if you're not going to lose money and you have abundant liquidity, then yield points and credit spreads are just math. and it is going to come in and flood the market. now do i want to sit there and be dogmatic and academic and fight it? and give away all that return? or do i want to invest with it until something changes? and the thing that has to change is the probability of losing money and as matt said, the central banks are underwriting this. that 75 basis point in cuts led to a huge mortgage refi. and consumers are spending that money. so you have a very stable environment. jonathan: let's take a single name. let's take tesla. the 2025 note. it has come up on the program so many times. that yield when it was first issued, everybody knows the story. record low yield for that maturity, for that credit rating. the yield on that now is 480. 4.8%. on a ccc credit in the united states right now. that has upgrade potential, i understand. it has a big equity cushion at the moment. we have the cash flow story that has improved over that last few months. all those things in this credit's favor. but are we saying that tesla 2025, around 4.8, is that when you can yield on five-year money from a ccc credit? bob: i think tesla is a phenomenal one-off story, where the stock quadrupled in price. so that is like looking at government debt to gdp at 100% and somehow gdp quadrupled. so the debt has not changed but now it is only 25%. i think that is some of the dynamic that is going on. it's an interesting company. there is a lot of moving belts. they have only got one outstanding fixed rate bond. if people want to buy, go ahead. jonathan: the majority of the debt profile over the past through years has been through the convertibles as well. it is all in its favor. i guess what i'm asking is if the traditional metrics, if they do not matter anymore, how on earth do you assign a price, a valuation? bob: it is being overwhelmed by the liquidity. i think that is the metric you have to weigh in. you have to be willing to ride that. i was telling a story earlier, that clients will come to me and say i don't like high-yield, i don't like emerging-market debt, i will put money in your income fund. our income fund take that money and put it out into the different sectors, into high-yield and into emerging market debt. you can't fight that dynamic. right now, if you're not going to lose money, why would you? jonathan: final word, priya. priya: it is a global market as well. the liquidity bob was talking about is a global issue. with bunds at -40 basis points, 10 year germany at zero, how much of that money is coming into the u.s.? apart from the u.s. issue, there is a global amount of liquidity, excess saving overinvestment, it will take real rates much lower. i think the fact that the entire selloff over the last week was all driven by real risk -- that tells you why the payroll report did not matter. real rates were heading positive -- that does not make sense in this global liquidity environment. jonathan: the guys around the table sticking with us. coming up, still ahead, the final spread. the week ahead, featuring jay powell's semiannual testimony to congress. that is next. this is "bloomberg real yield." ♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." time now for the final spread. coming up in the next week, a slew of fed speak, including the big one -- jay powell, his testimony to congress. cpi data coming out of china. and u.s. retail sales, a big data point to close out the week. to close out the show, bob michele, priya misra, matthew hornbach back with us. let's talk about the testimony from fed chair jay powell. the review of monetary policy for the fed and the ecb. what are you looking for from those two things at the moment? bob: inflation targeting. are they moving off the 2% target? are they going to a range? that is predominantly what i want to see. priya: i would agree. i think the fed has said they would not move their inflation target, but they are -- are they talking about range here? are they talking about how much they will let the economy run hot? what are the new tools? are they going to be effectively easier when the economy is hot? are they going to let it run to 2.3%, 2.4%? i think we will be looking for some details. i am not sure we will actually get the details, because they are not done with the review until the middle the year. matthew: i would like to see two things. number one, i'm curious to see what they would do with the dot plot. i think it is an important forward guidance device. the second thing i am looking for is some inkling of a plan for what they will do when they get back to the zero lower bound. what will the next round of qe look like? will it be a yield curve control type program? where they are giving up control of their balance sheet to the marketplace? or would it be something less aggressive? jonathan: a few things to unpack there. on whether they will shift things away for the inflation targeting. is there any scope of surprise, given the fact there is plenty of evidence that, as the review goes on, a lot of this is bleeding into the reaction function and the decision-making at the fed already? matthew: the scope for surprise is probably pretty low. we don't expect them to do anything that binds their hands to a certain policy task. but it's all about language. language matters. it is part of their forward guidance strategy, using language. so the language will be key. jonathan: we will use you guys for some guidance right now. we will do the rapidfire round. three quick questions and three quick answers, if we can. we begin with 10-year yield in united states. 1.6% on the u.s. 10-year right now. what do we hit first? 140 or 180? what do we hit first? 140 or 180? on a u.s. 10 year yield. 140 or 180? priya: 140. bob: 180. matthew: 140. jonathan: next question. high yield, spreads around 350 right now, in and around 350 basis points on u.s. high-yield spreads. are we tighter or wider by year-end? 350 now. are we tighter or wider by year-end? matthew: tighter. bob: wider. priya: wider. jonathan: interesting. fed cuts this year for 2020 from federal chair jay powell, 3, 2, 1, or none? priya: two. matthew: none. bob: one at year end. jonathan: great to catch up with you all. to bob michele, priya misra, matthew hornbach, thank you. from new york city for our audience worldwide, that does it for us. we will see you next friday at 1:00 p.m. new york time. that is 6:00 p.m. in london. this was "bloomberg real yield." this is bloomberg tv. ♪ ♪ francine: rothschild is one of the most famous names in the world of finance, tracing back over 250 years. from the jewish quarter in frankfurt, the family expanded across europe, becoming bankers for royalty and government for generations. along history comes with preconceptions. so how do you modernize such a storied brand and its business? on this episode of "leaders with lacqua," i meet ariane de rothschild. ariane de rothschild, thank you so much for joining us here.

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