Still attractive but not breaking out. We are going to test 1 . A lot of things have to go incredibly wrong to get down to 1 . 1. 2 on the 10 year, we have to be looking at a global recession. I dont see a resolution on the trade front. I think that continues to weigh on the u. S. Economy. Not a resolution but some progress. The fed will have to come back and ease again. The fed is going nowhere. There has been a tremendous shift easier across the central Bank Landscape in 2019. How can that happen in 2020 . It probably couldnt. Lisa everyone ganging up on bob michele. We have more perspective. Joining me around the table is Marilyn Watson of blackrock, Matt Hornbach of Morgan Stanley and Subadra Rajappa of societe generale. I want to start with you, marilyn. Do you think that now that we have some contours of a trade deal, that we will seek 10 year treasury yields bleed higher into next year . Marilyn we have to see with the details are on the phase one trade deal, how much they will roll back next year, the impact for the rest of this year. It would reduce some of the headwinds if we see more stabilization. But i think going into next year where you had some of the we think the fed will probably be on hold until next year. That is the message we are sending out clearly this week, in terms of the data, the u. S. Election coming up next year, we think the u. S. Economy is moderating but will continue to grow. It is hard for us to see the 10 year break out of the range it is in currently. Lisa to that point, we see treasury yields lower on the day even though we saw the removal of the december 15 tariffs. Why arent yields lower . Matt at 1. 95, the market was pricing in a phase one deal that included a lift of the tariffs from september 1. We got half of that. At 1. 70, you are pricing in no rollback of anything, so we split the difference, rallied into the middle of that range. I think we have been trading in line. We track the 10 year treasury yields versus the inverted cny. That correlation has been very strong. I would say this is trading very much in line with the trade sentiment, as marilyn pointed out, there are no details or specifics in the announcements and the headlines we have had the last couple of days. Lisa that has not stopped people before. The lack of specifics does not necessarily mean anything. If we get a greater sense of a deal, do you expect 10 year yields to climb substantially above where we are currently . If you look at positioning, you can see people were expecting this rally, expecting yields to come in. Now they are pretty neutral heading into next year. Marilyn going into next year, it is hard to see the yield breakout from here. It could go up to 2 . It has rallied today. Going into next year, unless you get some significant new news, more than the market is expecting, than the headlines suggest, it is hard to see a catalyst for yields breaking out too much in either direction. Lisa subadra, do you think of heles call of 1 on tenured treasury yields is not your call . Subadra it is actually more in line with our calls. We have 1. 20 by the end of the year. We are calling for a meaningful slowdown in growth next year. We think the u. S. Economy could potentially go into recession. Under the circumstances, the fed could deliver three or four cuts. 1. 20 is very much in line with bob micheles call. Lisa so you agree, and the people ganging up and subadra i think the recession call is a tough one, but they are more skewed to the downside, there is uncertainty around the trade negotiations, elections next year, you are seeing people seeing the ecb continue to purchase assets. As well as the demand from treasuries for treasuries from overseas accounts is quite overwhelming. Even though there has not been millions much yield pickup currency adjusted basis. Under currency adjusted basis. Under the circumstances, i dont see yields rising meaningfully from here. If there is any weakness in the data, you will see a rally in bonds. Matt the thing we are focused on next year is the confidence c suite level and corporate america. We dont have reason to believe that youll continue to see a deterioration in ceo confidence. In order to get the economy to slow to a point where the fed would qualify it as a Material Change in their outlook, you are going to have to see ceos get pretty pessimistic on the outlook in order to start laying people off. Eventually and that would happen, the fed would react to that, but we dont have reason to believe ceo confidence will all that hard in an Election Year because of the uncertainty. You dont want to lay out 20 of your workforce prior to the election because if the outcome is a positive outcome, you will have to hire all those people back at higher wages. Subadra ceo confidence is a t decade lows. To me, that is more of a concern. Business sentiment is low, ceo confidence is at decade lows. To me, that is troubling. Matt i will reply to that. When you look at diffusion indices, thats correct. They are at decade lows. But when you look at measures of the level of ceo confidence, they are above levels that existed prior to the election of donald trump. When you look at the level of ceo confidence, it still looks perfectly fine. Lisa your call on treasury yields . Matt we are at 1. 75. Marilyn when you look at the liquidity in the system, that it is increasing again into next year as well, i think the fed is doing a lot going into yearend, helping with the repos. When you look at that, that will continue to contain the dollar, support growth. It is hard to see a reason why i think the u. S. Would deteriorate significantly from here. We think it will remain on trend. Lisa what is your 10 year treasury call . Maryland we are between 1. 8 and 2. Lisa the fed announced new repo terms, taking place this month and next. A strategist weighed in on this, saying the fed expects take up to be this yard this large and they want to make sure they provide that level, or they just wanted to make sure everyone knew they were not going to undersize it. I would not expect this to be fully subscribed, but it should be fully comforting to participants that it will be available. The interesting thing is that we have seen all of the recent repo operations oversubscribed. Does this indicate there is some concern among Market Participants . Matt i wouldnt call it stress or concern. I think people were stressed out a couple months back when, in the wake of what happened in september, they thought we need to get our act together for yearend. I think that cost a lot of stress. I dont necessarily think theres going to be a lot of stress over yearend, in part because the fed is sending a significant signal here. You also have to remember the treasurys cash balance is expected to go up, so the fed will have to provide some extra liquidity to account for that. Lisa do you think the repo man cometh is more of a bogeyman, will there be any serious disruption . Marilyn there are signs of stress in the market, but the fed is doing as much as it can, is demonstrating that it is willing to step up and help the situation. It is not that there is no risk , but it is a diminishing. Lisa Credit Suisse this week was talking about qe 2. Subadra, do you think the Federal Reserve will be forced to buy coupon treasuries in the face of stress that could materialize by the end of the year . Subadra it is possible but unlikely. They still have a lot more room on the rate cutting side of the equation. We are well above the zero lower bound, so the fed has more room to cut rates before they start doing qe. The thing that is happening right now, there is sort of stealth qe going on, buying bills, potentially could buy front end coupons. That is where the uncertainty comes from. There is some easing of monetary policy, even though the fed is suggesting theyll be on hold for the rest of next year. Lisa matt, you look like you are itching. Matt not at all. Lisa please go ahead. Matt i think the idea that the fed can certainly buy coupon securities is one to think about because powell suggested they were considering that. But it is not something that we expect them to do until may when they convert their 60 billion a month of tbill purchases into purchases that are meant to sustain the level of reserves in the system, as opposed to building them up, which is what they are doing today. In may, we expect them to convert that 60 billion a month into 15 billion a month and by coupons across the curve, which is what they are doing with their agency pay downs. Lisa i did say qe 2 but i did meant qe 4. Its hard to keep track. Coming up, the auction block. No end to the december lull. Friday marking a Third Straight day of zero highgrade issuance. That is coming up next. This is bloomberg real yield. Lisa this is bloomberg real yield. To the auction block, we begin in europe where the primary market is slowing ahead of the new year. But there is a big leveraged buyout from nestles ice cream business. Activity from u. S. Grade dwindling this week, just under 4 billion of new debt has been sold thus far including offerings from Canadian Imperial Bank and apollo management. In high yield, junk bond issuers rushed in early this week as yields dropped to a fresh twoyear low. Cox media led the pack. On track to price 8. 4 billion by the end of the week. Speaking of credit markets, peter share of Academy Securities says it may be harder to find value in the junk space going forward. One thing i look at in the highyield space, for every dollar that comes into yield and highyield, it is going disproportionately into bb. They dont want to own ccc and bbb. There are some companies that have benefited too much. It is time to be a credit picker. Lighten up on what is risky. The value is not there the way it was a year ago. Lisa still with us is Marilyn Watson, Matt Hornbach, Subadra Rajappa. Do you agree it is time to lighten up on highyield debt . Marilyn going into next year when we have a moderate growth environment, i think its really important to focus on the underlying fundamentals. I think we will see increasing dispersion between the performance of individual Corporate Bonds. This year, that should be interesting. We have seen a higher number of upgrades than downgrades. A number of corporate focusing on deleveraging a little bit. In this environment, given the supply and demand dynamics, we still have a huge amount of demand compared to supply, so there is a huge focus on income, carry, but really understanding the underlying fundamentals will be important. Lisa so you are punting. Marilyn we will be selected. Matt our global head of credit strategy is of the similar view, we continue to like being up in quality in credit, particularly investmentgrade. We are expecting another range bound year for investmentgrade credit spreads. Because we expect a range bound year for treasury yields. When you are looking for highgrade Corporate Credit, youll have to look even harder next year. That is what we are recommending investors do. Lisa i dont mean to be flip about that, marilyn, because a lot of people are saying that, and even this year, you saw credit dispersion that was dramatic. Is there a way to scope the amount of credit dispersion we have seen . Marilyn when you look at the performance of durations, Corporate Bonds, that has had a huge impact. We are not going to see that next year as well. We need to price in how much Duration Risk will be. We have a strong preference for getting toward the front end of the curve. Now when you look at the liquidity, that is incredibly important in the market as a whole but also underlying issuers. Look at the management, financials, you have to understand the risk return dynamics. Lisa subadra, that brings us to your space and the concept of duration. Duration has grown to some of the highest levels on record in the investmentgrade and highyield space, spreads shrinking to the lowest in more than two years. Do you think this is going to be a risk or tailwind next year . Can credit spreads rally, can you see a rally in treasury yields . Subadra it is possible. I think it has more to do with the demand dynamic for Corporate Bonds. Typically if you see a meaningful slowdown or if the u. S. Economy goes into recession, you tend to see credit spreads widen. This time around with the amount of demand you are seeing from overseas accounts, especially looking at the balance of payments and demand from japan, what you tend to see is a lot of demand for Corporate Bonds and any higheryielding assets. About 13 trillion to 15 trillion in negative yielding assets. When you are seeing is this constant demand. My concern is that people will become complacent to the risks in the underlining economy going into a recession, credit spreads being too tight. Credit spreads will not be a good indicator of a recession, or a meaningful slow down, because of the demand dynamics. Matt if we did have a rally in the treasury market next year, i would suppose it would be on the back of an aggressive fed easing cycle. The more the fed eases policy, the lower those currency hedging costs will become. If you are an investor in japan and you have spent the past couple of years not hedging your foreign bond portfolio, you will probably raise your currency hedges, and youll be able to pick up more carry when you do that. The need to own Corporate Credit as the fed takes rates to zero diminishes. I would actually expect to see treasury yields go down and credit spreads widening in that particular scenario. Lisa sounds like it is not very good for credit. Barclays calling for lower returns in a highyield space, writing, we expect triple c spreads to be relatively unchanged in 2020 with higher default losses and price declines remaining elevated for downgraded bonds in this ratings bucket. You also had ubs coming out talking about how the ccc space and the weakness we have seen and leverage loans a leading indicator of what we may see next year. Marilyn, do you agree . Marilyn next year, talking about dispersion, duration, i think it is really going to be critical what we see from the u. S. China trade talks. Also the huge uncertainty coming from the u. S. Election. We have yet to see the policies of the democratic candidates, yet to see in terms of the fiscal space in the u. S. , what will be possible. There are huge amount of unknowns that we have yet to price into the markets for next year. Lisa matt, cccs, polling nice, or staying away . Matt we are staying away. Definitely the focus of our Strategy Group is up in quality. That has been our focus this year and that will continue to be our focus in 2020. Lisa coming up, the final spread, the week ahead featuring more fed speak and another round of global Rate Decisions. That is coming up next. This is bloomberg real yield. Lisa this is bloomberg real yield. Time for the final spread. Coming up over the next week, on sunday, china reporting retail sales and Industrial Production numbers. Tuesday, Robert Kaplan and Eric Rosengren speaking in new york. Wednesday, ecb president Christine Lagarde speaking in frankfurt. Thursday, Rate Decisions from the bank of england and bank of japan. Marilyn watson, Matt Hornbach, and Subadra Rajappa are still with us. Which Rate Decision will be the most important to keep an eye on . Subadra with all of the brexit developments, i would Pay Attention to what is coming from the bank of england. We have seen a collapsing on breakevens in the u. K. We will see what we get from them. I think there is more room for policy accommodation coming out of the u. K. Matt i completely agree with subadra. I think that is a place to focus on. I would say it gets more interesting the deeper into 2020 we get. Next week may not be much of an event. Lisa marilyn, will anything be much an event coming up . Marilyn we think that brexit will remain on hold the next week. Next week will be important because we will also learn who will be nominated to replace mark carney as the head of the bank of england as well. Next year not only will you have someone else heading the bank of england, but as we go into brexit negotiations, the u. K. Potentially leaving the eu, looking at the underlying data, events next year will be crucial. But next week from the bank of england, it will be more of a steady as she goes conversation. Lisa 2019 was a year of easing. The biggest wave of global easing collectively of all the Central Banks in the direct aftermath of the financial crisis. There is a question, is that not to be repeated . Are we going to see something, if not to the same magnitude, the same direction . Matt that is not in our forecast, i can tell you that. After 30 years of seeing Central Banks in these a bunch and not seeing inflation, you can never discount the possibility you get another wave of central bank easing. But it is not in our forecast at this point. Subadra it is in our forecast. We think the ecb stays the course, the fed could cut rates, if there is a meaningful slowdown in the u. S. Economy. For the most part, as long as inflation remains muted, the bias will be toward easing. That is what i feel will drive the bond markets. Lisa i love that you have a contrarian take. Time for the rapidfire round. The first question, matt was cheating, will the fed cut rates next year . Marilyn no. Matt no. Subadra yes. Lisa are ccc rated bonds a buying opportunity or catching a falling knife . Marilyn be selective. Lisa all right. Matt catching a falling knife. Subadra im in agreement with matt. Lisa emerging markets or developed market corporate debt . Treasuries but also emerging markets. Matt emerging markets. Subadra emerging markets. Lisa the reason i said you were cheating, you were reading the questions first. Which is smart. Marilyn watson, Matt Hornbach, Subadra Rajappa. Matt is never coming back. That does it for us. Real yield will be back next friday at 1 00 new york time, 6 00 in london with all the developments on the rate front heading into an exciting 2020. 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