A bit of a mixed bag. Employment growth decelerating. It is consistent with some slowing. The economy is slowing. The manufacturing slowdown is continuing. But it is happening at a very gradual pace. We are slowly pressing on the brake here. It is not a falling out of bed moment. It is not a flashing red, the economy is falling off a cliff number to me. Definitely falling off a cliff. The market is not doing anything. The market is priced in for an october rate cut. We have to pencil in a fed rate cut in october. For those looking for a decisive message, a deterministic one, they did not get it. Jonathan joining me around the table to discuss in new york are our guests, oksana aranov, lisa hornby, and Gershon Distenfeld. Guys, i want to begin with what changed this week for all three of you. Did anything change for you, oksana, this week, given the data we had . Oksana nothing has really changed on the economic backdrop. We did have some weak numbers there, but an ontrack jobs number and an upward revision for august. We have been on this trend for a while, where revisions have been up. It is a weird environment we have been in, where employment continues to be strong, and the probability of a fed cut went down slightly, from around 90 to 75 or so. The fed is continuing to walk a tightrope here. The economy is continuing to you could call it a slowdown or continuing to grow at a slower pace. Does it warrant a return back to extraordinarily accommodative measures . We think not. The fed is caught in a tough spot here. Jonathan what is your take, lisa . Lisa i agree with everything oksana said. Our view has been for a while the u. S. Is going slow from the previous pace we saw last year. It was clearly taxinduced growth. We have come down closer to 2 for this year. Our view for the rest of the year is 1. 5 to 2 , give or take. This is exactly what we were thinking. Manufacturing is clearly in a recession, that is a global phenomenon, not aided by trade in the u. S. , but Everything Else seems to be fairly stable. Yes, we had the weaker service number, and we have to see if that continues, but for us, this is a 1. 5 , 2 u. S. Economy. Jonathan that was the story coming into 2019, gershon. Many, many people forecast that we will return to trend growth. Many people said that payrolls growth will decelerate. We have seen that the last 12 months as well. Yet when you get punched in the face by a growth scare, you get gripped by end of cycle dynamics, end of cycle anxiety. What is your message for people that are going through that right now . Gershon what did we learn this week . We learned that manufacturing is a lot weaker than we all thought. Maybe it is not a matter of whether we will or wont have a trade war, it is all the uncertainties, because we do not know what tomorrow will bring under the trump presidency, and Business Ceos are hesitant to spend money. The billion dollar question is does it start to spread to the consumer . Payrolls will not tell you anything, because that is a lagging indicator. The other thing we learned this week, where i might disagree a little bit, the market saying this is sure the fed will cut in october. If you listen to what chairman where iaid last time, actually agree with him, he said they were good for right now. There was no reason based on what they knew to cut further, but they would react and consider the incoming data. I think this is a clear sign that they will continue to cut. Jonathan there is a little bit of tension at the moment. The data certainly says maybe now you should be cutting again, but listening to the officials through much of this week we closed out the week with chair powell much of the week, the officials not showing their hand here, not showing their hand here at all. What gives you the conviction that in october, the end of this month, they will make another move . Gershon it is not clear we go into a recession i hate using the word recession, because we do not know what it means anymore but if we have a protracted slowdown, it is not clear how much legroom they have using conventional policies, maybe go to qe again. What they have said is that they think being preemptive can avoid a slowdown. If they start to see weaker numbers, even a little part, they will say, we do not know if it is spreading to the consumer. We might not have that data nnytime soon, as a insurance policy we will , continue to ease. Jonathan oksana . Oksana the problem with being preemptive is we have seen it not work across the pond in europe and japan. The big issue is, is the fed frittering its ammunition away for a time when it needs it and wont have it . In terms of Consumer Confidence, that is an important piece that we are watching very closely, because the u. S. Consumer is 70 of the u. S. Economy. And now what we are seeing is the Consumer Sentiment index is starting to move down, Business Confidence starting to move down. In spite of some of the economic , you know, positive surprises, frankly, that we have seen if you look at the economic surprise indices, they have actually trended up. But consumer and Business Confidence is trending down. This is a tough road. Lisa although we have a little bit of a disconnect between the survey data, the confidence data, and actually the hard data. When you look at hard data, retail sales last month were extraordinarily strong. Oksana and that is consistent with strong employment. Write . Right . Lisa absolutely. Oksana we will continue to see strong retail numbers, but Consumer Confidence is important. We have seen it hit across the pond, where the savings rate is starting to move up to precrisis levels in europe, despite the fact that rates are negative. Consumers are really gaining anything. Gershon to be fair, i do not think the fed necessarily should cut, i am listening to what they have been saying. I agree, there is a danger when you get to a point where europe or japan have been forever, you have to be unconventional or it will be too late. Jonathan lets have the real conversation the bond market taking up on the idea that they are taking another step towards a rate cut. Considering the massive outperformance we saw at the front end of the treasury curve. What did you think about that . Because if i thought we were going to get really bad data this week, i would have thought duration would have done pretty well this week. I would think we would see a bund market move as well. I would not think treasury yields would do with a have done and bund yields would do nothing through the week, pretty much unchanged over the past five sessions. What do you make of that . Gershon this gets to the discussion we have had for a long time, is it justifiable that bund yields are so low . Either we go into a deflationary spiral, or you are going to have negative real rates and no inflation for a decade. The more interesting thing in the u. S. Was the implied breakevens and tips, which hit a 10year low of 1. 47 early in the week. Essentially, with rounding error, you are at 0 inflation, 0 real rate baked into the next 10 years. That is a very pessimistic sign. I continue to think one of the markets is wrong, either the treasury market is wrong or the equity markets are wrong. If we are really going to not get any real rate of return, growth, or inflation, equities are way too high. If things are fine, yields should be a lot higher. Jonathan if you had to take optionality on the options right now, if you had to have a base case, what would it be . Gershon i think our base view is that we will have a slowdown here. I do not want to use the word recession, because i do not know what it means, but we are a going to have a protracted slowdown. The fed will eventually have to react. Is that really a bad thing . We are 11 years into an expansion. I get it that in theory, Central Banks and Monetary Policy is supposed to keep the economy as level as possible, but that is only in theory. We have not repealed the laws of economics, there are shocks all the time. And i probably should not say this, but maybe a mini, tight recession clears out some of the excesses, some of the businesses that have been formed that should not exist, and sets us up for a better path for the next decade. Jonathan you just used that word, you called it a mini recession. [laughter] r word is a dirty word in our firm. We do not like to use it, because we do not know what it means anymore. We pretend there is a line, two negative quarters, but it does not apply internationally, because china is still growing, getting a lot of global growth. A little bit to the left of this line, it is a big problem, but a little to the right, we are fine. Thats not how it works. It is a continuum, and that is what we are seeing right now. Lisa i could not agree more. The fact that you can go into a shallow slowdown or little anaethma, andn an f the markets keep going back to the banks and saying hey, help us make this go away. And we are seeing perhaps the limits of centralbank policy, because not only have u. S. Rates, bunds have not really responded dramatically. If you think back to when the ecb threw everything and the kitchen sink into the market, lowered the deposit rate, bund rates are actually higher today than they were at that point in time. Perhaps we are seeing the limits of centralbank policy, and that is important for portfolios. Lets bring it back to what is happening in portfolios. Portfolios are chockfull of duration, that is entirely Interest Rate risk and moves entirely on what happens to the 10 year here, and i think the return potential is extremely limited. Jonathan lisa . Lisa i think there is a floor on bund yields, that is what i was going to say. The ecb has said they are done with Monetary Policy. There is nothing more they can do, which puts a floor to where they can go. They hit 80 basis points, but 60 is still an unreasonable level, in my opinion. I think we are reaching the end , and now you are starting to hear talk about more fiscal stimulus. In germany this week, there was talk about dropping the black zero. The ability to have any sort of budget deficit spending. I think you will hear more from that in the coming weeks and months. We need to move into a world of fiscal. Jonathan i think a lot of people would agree with you. Lisa i think that is what people are coming around to. I think that is negative for bond yields. Jonathan you guys are sticking with me. Coming up, the Auction Block, the primary market remaining open despite a week of volatility. Thats coming up next. This is bloomberg real yield. Jonathan im jonathan ferro,. This is bloomberg real yield. I want to head over to the Auction Block and begin in europe, where the Fourth Quarter is off to a hot start. A greek phone operator became the latest junk rated borrower to capitalize on the hunger for high yield, selling debt to pay its owners a dividend. In the u. S. , issuance of Corporate Investment grade bonds was more subdued, with under 10 billion sold so far this week, a stark contrast to septembers heavy volume. In high yield, markets shrugging off concerns about an economic slowdown, three deals priced on wednesday alone, including a wellreceived triple c credit with allianz holdings. Sticking with corporate, credit finding some relief in the payrolls report but highyield bonds recorded their longest losing streak in 2019. Allianzs Mohamed Elerian weighing in. Mohamed when you get to really low spreads, and especially when the riskfree asset is low, at some point, the investors say, i am not getting compensated for the forward risk. Then you get a blowout in spreads, then you look at highyield relative to every other asset class and say wow, that is attractive. What is underlying that is the shift between absolute and relative mindsets. I think that is going to continue for a while. Jonathan weighing in around the table in new york, oksana aranov, lisa hornby, Gershon Distenfeld. Gershon, i want to start with you. The third mini scare in markets in 2019. If you look at u. S. Highyield spreads, the fourth of the year in and around 3. 50 , the top, the ceiling in and around 4. 50 . Is this any different than the previous two scares we have seen in 2019 so far . All of it we talked about in the last segment. It is no different, investors keep coming back to they need yield and the bottom is not falling out, there are not a lot of defaults. That is what is going on at the service. Dig deeper and you see a bifurcation. If there is a good, solid, double b deal, it flies off the shelf. At 4. 75 , it was overprescribed and traded up in the aftermarket. Then you have a deal like shutterfly earlier this week, marketed for two or three weeks at 7. 5 with no buyers. The final price with was 8. 5 and traded down in the marketplace. So investors are willing to buy things that, they might not have the greatest yields in the world, but they have better than riskfree yields, and they feel better about it, but they are not willing to step out and buy the riskiest in the cycle. Jonathan a difference between now and q4 of last year. December 2018, the primary market just shut down. The idea that we got some of these deals done on wednesday. Everyone was freaking out over an ism. Is that encouraging to you, that the market is still functioning . It isn is definitely functioning, but the reality is that investors are showing again the need for yield. That is not going to change it is not just the new cycle. It might pause for a day or two, but money is still coming in and that is not going to change until it is apparent that we are in the r word i dont say that anymore jonathan the mini r. Gershon the mini r word. Whatever that means. Or we see losses and default. Jonathan oksana . Oksana on the surface, we have a tremendous amount of inflows into the highyield, about 15 billion, and that continues to support asset classes, the tremendous need for yield. If you look at under the surface, you are seeing some red flags, at least for this price level, because everything is price dependent. What you are seeing is the default rate and high yield is starting to come up, about 2. 5 at this point. Last year, and the high ones. We are seeing slow recoveries of the defaults that we did have, coming in at . 36 on the dollar, and an interesting dichotomy has developed an highyield market. Triple cs tend to lead on the way up and the way down in doubledigit years, and this has been a doubledigit year for highyield. We are seeing that diverge. In the third quarter, triple c yields were solidly negative, down 2 to 3 , and the higher part of the market was very positive. That is a bit of a warning sign to me, because typically, whether you look back at 2016, 2017, or back in history, triple c, the first one is on the way up, the second is on the way down. The dichotomy we have broadly in fixed income, you mentioned equities versus bonds, but what we have with fixed income is credit spreads are saying everything is great, and rates are going up, but the check engine light is on, so to speak. One or the other has to dominate, either rates are right and spreads have to widen to raise less of the r word or slow down. Or credit spreads are right and rates have to come up to meet the sentiment that look, everything is fine. Jonathan i will put you on the spot. What is your base case . What needs to happen . Oksana we think everything across the board is very, very richly priced. Even the things that perhaps fundamentally are not terrible and certainly we are not , seeing anything terrible from a fundamental standpoint, but pricing is very rich. Double bs in the 200s . No thank you. Jonathan lisa hornby . Lisa double b to triple b, or double b to triple c, those are the most expensive that you could possibly find. So for us, as multisector investors, we are staying away from highyield at the moment. Our Portfolio Managers have more Investment Grade than they have had a number of years. We are looking at Investment Grade, Higher Quality i was discussing this last time i was on your show, 430, 450 has been a buying opportunity in highyield spreads. I think we are in a more uncertain economic backdrop than we were before. The vulnerabilities have clearly increased in the u. S. , i will not use the rword. Jonathan everybody is afraid of the rword. [laughs] binaryt is not a situation, it is not either be our on or off, it is a slowdown. You want to become more defensive and liquid in your portfolio. Jonathan gershon . Gershon there is a lesson here for investors. Either you are buying a credit fund at highyield aura duration fund. Or a duration fund. The credit people are never going to tell you that high yield is not a good place to be, and duration people are never going to tell you that you should not buy duration. Acgyx. We balance. Half of it is credit risk, half of it is rate risk. Given that we do not know which one is overpriced, balancing them is good. Its just not how people infest. Oksana the problem is they are both viciously overpriced. Betting on rates to go from alltime lows to new alltime lows is a gamble. No one knows. Markets have gotten this consistently wrong time and time again. When the curve looks the way it does and you can still earn 2 on the front end of the curve and the 10 year is offering 1. 6 with Duration Risk you can buy the japanese bonds and hedge them back to the dollar, you end up with the rate of u. S. Cash, essentially. Why would you take all that risk . Gershon so you return all of your investors money . Oksana we are being very cautious and focusing on safe carry, and a big part of that are liquid floating structures. You can continue to be there and clip a very conservative coupon and be ready for volatility, which is coming, because what is going to bomb everyone out at the end of the day, rates and credits, is math. That is the new word i am introducing here, because fixed income is a mathematically bound asset class, and we are getting close to those bounds. Jonathan my guests sticking with me. Still ahead on the program, the final spread, the week ahead, featuring a new round of u. S. China trade talks just around the corner. This is bloomberg real yield. Jonathan im jonathan ferro. This is bloomberg real yield. It is time now for the final spread. Coming up in the next week, a ton of fedspeak for you, including from chair jay powell. Through to monday, we get pmi data from china followed by another appearance from chairman powell on tuesday. On wednesday, the fed releasing minutes from its septem