dedicated30 minutes to fixed income, this is bloomberg real yield. ♪ coming up, the federal reserve delivers a dovish hike and treasuries rallied. how chair yellen can pull off a beautiful normalization. what could be a record -- cracks begin to appear once again. the uncertain world of politics collides with g-20. e.m. comes out on top.

we start with the big issue, the federal reserve and a dovish hike. >> we learned that janet yellen is the perpetual dove. >> the fed is indicated something like three rate hikes again next year. there is an expectation they might accelerate that but i do not think it is likely. >> i think we could see four hikes this year, depending on how strong the economy shows up. >> if the data continue to say the economy is coming back, they maintained their confidence, june is certainly on the table. jonathan: the fed took the lead on rates and the markets followed. joining us from california is mohamed el-erian. with me in new york is robert tipp, head of global bonds and this week, lisa abramovitz joining us. mohammed, i want to start with you.

are we witnessing of we could change where it is the fed leading the market and out the market leading the fed? mohamed: i think we are and we saw it earlier when the fed saw the implied -- was only 30%. to triple that probability, so by the time it hiked two days ago, the market reaction was favorable so i think we are seeing the fed transfer regimes, and it will be leading rather than following market. jonathan: most people would characterize it as a dovish hike perspective to expectations. do you disagree? robert: i do. when you look at the dots and how they progress, the participants of the meeting that wanted the under as of december 16, they had six of them that wanted the under and five that wanted the under. when you come to this meeting

you have five that want the over and three that want the under, so in other words, the balance. the median's did not change but that participants shifted. when janet yellen was describing gradual and what that means, i think they may be setting the market up to hike three times over the balance of the year but do not want to over emphasize that and scare the market which might make it impossible to do. jonathan: is there a hawkish till as far as you see things? mohamed: yellen went out of her way in the press conference to moderate it. i think what you are seeing is a more confident fed. it said it sees the domestic economy improving, sees lower risks from the rest of the world, and is comfortable about three hikes this year, three hikes next year. i think what you will see next is a shift in the balance of risk, that they will hit to the

extent that the change in the baseline is toward a fourth hike rather than towards two hikes this year. ifhink down the road president trump and congress deliver on the pro growth trifecta, you will get a fourth hike. lisa: i have to say, i instruct by the fact that the market did not move all that much. maybe this is short bets getting squeezed out of the market, but if you look at what happened to the yield curve, you can see down here was the all-time low. that was the lowest level since 2008 as far as the compressed five and 30 year yield curve. it blitzed up a bit but this is not the entire market considering we are going to see some kind of major growth. jonathan: what do you make of the message that comes out of the curve which has been flat over the last couple of months? mohamed: i do not make much of it. , and imake a lot of

would be interested to see what lisa thinks, the spread of the bund. i and the bond -- think there is a phenomenon going on where central banks are becoming less dovish around the world. lisa: if you go into my terminal you can see the spread he is talking about. it is the two-year u.s. yield versus the german two-year yield , the highest level since the 1990's. this basically leads to a question of, will this be borne out in the currency markets or is this where you will see the dollar strengthened potentially if people come to the u.s. to catch those yields? jonathan: the front end has been anchored ied's rate of 40 basis points and if you look at the situation in europe versus the united states, there is a clear divergence between japan

bouncing around the middle, and treasuries way up there. will that spread reconcile anytime soon? robert: even at the ecb i think they are becoming concerned. have a very tricky job. on one hand they want to taper and get out of the bond buying business, and reduce their risk that have not been able to avoid that. when you look at the bottom line on that graph, the two-year german bond, that is basically -- -90,honest 90, minus -70 basis points. the bundesbank will buy those and create a squeeze. they do not want a lot of long-duration. i think going to the negative depot rate was not a positive. basically favors taxing the banking system that is not well-capitalized. you want to encourage investment that it does not pay to do that if you are not well and there are not opportunities.

jonathan: they might consider to raise the depot rate before ending qe. let's say we get a 20 basis point move from the ecb back to -20. what does that mean for the curve,nd of the bund treasuries, and elsewhere? mohamed: that would be a remarkable changes they do that, and if they do that you will see the curve shift in a major way. he will also see currency traders scrambling. i think the bet that a lot of people have on that has not worked so far is that this version will continue both and monetary policy with the u.s. more hawkish, and in economic performance. if that does not play out we will get major movements in currency and the fixed income segment. i want to talk about -- jonathan: i want to talk about credit and bring up duration. we had a conversation building

up this program. was it the longer dated stuff is where the outperformance is? wouldn't you have expected duration to underperform in this kind of environment? why is this happening in corporate credit? robert: yields are a lot higher than the middle of last year so that brings and lots of long duration buyers and foreign buyers have been pushed to the back end of the curve. in order to get an excess return after hedging they need to go all the way out there. lisa: have to wonder how much this is where the foreign bid is. a lot of foreign investors have been coming into the u.s., pension funds and insurance companies trying to get that exits yield. the has been an incredible divergence between real money investors that are still plowing into these notes, and speculators betting against them and seeing if the prospect of inflation is not being priced in. i would love to get his opinion

on whether or not the market is due for an unpleasant surprise, which how much inflation will pick up our longer and rate, not pricing this in and all? mohamed: you are absolutely right about the liability driven investment that has led lots of sewage -- investors to reach for long, and try and match dated liabilities. the has had a big influence. in terms of where the shop is going to -- i worry more about something you have written about which is this combination of high leverage, lots of issuance, and credit quality that is not as good as spreads would suggest. i think the major issue facing credit investors is to ask the question, to the fundamentals really warrant where spreads are? jonathan: i will get to credit in a moment. mohamed el-erian sticking with us, robert tipp sticking with

us, and lisa abramovitz. we take it to the auction block, putting us on course for a record issuance. an important conversation between chancellor angela merkel and the president of the united states, that meeting happening right now live in washington, d.c., those two with a lot to discuss full conference -- coverage of that conversation on bloomberg television. you are watching bloomberg. ♪

jonathan: i am jonathan ferro, this is bloomberg real yield. we are potentially seeing something that has not happened so far this century, investment-grade firms on track to complete the busiest quarter for u.s. debt sales since at least 1999. getting in on the action, siemens, offering seven and a half million dollars in bonds, its largest in bonds sales. in europe, we have had 54 consecutive business days for issuance exceeding last year's longest run of 51. have seen over 50 billion euros of debt issued in that area. mohammed el-erian, robert tipp, and lisa abramowicz. what do you make of the surge in issuance going into a rising

rate environment? mohamed: it is totally rational corporate behavior. they are taking advantage of spreads and issuing ahead of what they think will be a rise in government interest rates. i think it is totally rational and the question is why investors have not been more hesitant when it comes to buying all of this stuff. jonathan: why haven't they? lisa: you have the international investors in the u.s. and also the animal spirits. if things will get better and yields will go up, at least credit has a cushion of extra spread. that is shrinking dramatically and investors are not getting compensated as much as they should be. jonathan: robert? robert: even though the fundamentals have peaked the liquidity is there and the default tend to stay very loud. remain verytends to good through the fed rate hiking cycle until the fed actually it maybe recession so

way too early for investors to be getting pessimistic. jonathan: there have been outflows, significant outflows in the high-yield space. theks in credit -- or cracks in credit beginning to show in a way you would expect them to? mohamed: i do not know if i would call them cracks. people are beginning to realize they are not being compensated enough for the risks they are taking, and that is particularly true in high-yield. there are lots of things wrong with that index. if you are buying the index, you are exposing yourself to a range of risks that go beyond simply the economy so i think it is rational. i think investors are starting to realize they are simply not being compensated enough. jonathan: the potential canary in the credit: my, energy. mine, energy.

this is the bloomberg index versus crude. the last time the index for high energy yield companies were this low wear when crude was $80. what does that chart tell you now that crude is nowhere near $80 but are we costs are what they are? robert: there has been a huge swing and it looks like it is overdone. in energy, for investment grade firms that have a credit conscious mindset is one thing. they may make it through this cycle, but the high-yield companies are on a nice edge. lisa: i would normally go with the pessimistic view that i have heard so much pushback so i'm on the other side. what is left are creditworthy companies, some who have been downgraded from investment. i do want to point out, it is not just energy companies

because we are seeing retail companies as the worst performing sliced of the debt market, and an increasing number going bankrupt. there butpotholes out it might be name specific. jonathan: is there potential for them to bleed through to the rest of the market or does this they isolated? mohamed: it is absolutely correct to say this should be a very selective investment. you want to be an active investor, not passive, has when you are passive you are buying the whole thing and not differentiating enough. we have typically seen investors overreact when certain companies go under pressure so yes, it can leak, that is investment behavior. problems, theve whole index gets contaminated, you get contagion and an overreaction. the right thing to do is have dry powder and wait, because i think certain segments of

high-yield and emerging markets will, under stress. goathan: is that the trade, to cash and get ready to pick up the pieces? robert: i agree you have to be selective but i think it is too early to be cautious. we have had a backup of spreads and there is a lot of anxiety coming into the fed meeting. i think you will probably see a recovery from the intermediate to long-term period performance. lisa: yes, there is some cautiousness when you look at yields but there is not cautiousness when you look at debt issuance. when you look at the leveraging of these companies, i will go into my terminal and look at leak. this is the total amount of high-yield bond issuance in the u.s. in march. the first line is this march and going back. we are on pace for a record march issuance of high-yield bonds even as we see more than

five -- $4 billion withdrawn over the past week. you have to wonder, are investors not taking into consideration these risks? jonathan: why aren't they? you said it was rational from the investor side but why aren't they lapping it up? mohamed: because goldilocks dominates mindsets. people think we will sustain a low volatility environment and they can capture low yields. those of us who have lived in the high-yield and emerging-market world have seen it over and over again. we get populated by crossover investors. they are not specialized in these asset classes. they come in typically through indices. they are two risk investors. the minute something goes wrong, because they are not anchored by fundamentals at the center of the asset class they tend to abandon it quickly, which is why

the asset class tends to overreact on the way up and all the way down. be careful also of the dominance of crossover investors because they are much bigger in volume than dedicated investors. jonathan: i think they are also known as tourist. robert l eric just mohamed el-erian sticking with us, robert tipp, and lisa abramowicz. points, 1.3% basis on the two-year. the 10 year rallying by nine basis points. coming up on this program, the final stretch. meet, andce ministers chair yellen. this is bloomberg "real yield." ♪

jonathan: from new york city,

i'm jonathan ferro. time for the final spread a retake a look at what is coming up over the next week. it will include another speech by the fed chair, and shinzo abe will be in germany as well g-20 finance ministers, where e.m. will likely be discussed. if you look at the bloomberg e.m. index, it has performed better than most people expected with donald trump and the white house. i want to bring back our roundtable. you are experienced with the emerging markets. it was soo this year easy to paint a pessimistic and negative picture for the emerging markets but it has ripped. why? mohamed: they lagged for such a long time and they were simply too attractive for crossover investors. jonathan: robert? robert: i would agree, the positioning was really wrongfooted. whether it is em or european

sovereigns, they are out of favor and now they are coming back. jonathan: lisa? marketsthink emerging seem to be following the price of oil and the global back trough -- backdrop for growth. this is my breakdown of industry and emerging u.s. dollar in quasi-corporate debt, brought to us by bloomberg intelligence. more than 25% of the debt included in this index are titled -- tied to oil and gas companies. where oil goes, so too does the fate of this emerging-market debt. jonathan: is that your experience? oil has a bignk impact, commodities have a big impact so yes, that certainly is part of the story. another part is simply that the asset class was not as bad as people made it out. this is an asset class that almost by definition goes

through potholes, etc. people underestimate the amount of resilience there is in that sovereign and quasi-sovereign segment of the asset class. were talking earlier about to worst investors going into high-yield. what about tourist investors and high-yield -- mohamed: it is the same phenomenon exactly and if you are a dedicated investor you tend to fade the effect of tourists and you want to have dry power -- dry powder. a tourist gets attracted by the pamphlet, the beach, but the minute there is some crisis they had to the airport and forget that part of being in and emerging-market is you tend to have weaker institutions and things happen. you want to fade on the way up and on the way down. jonathan: one word answers,

mohammed, i want to begin with you. do you want to be long high-yield or long em? mohamed: em. robert: em. lisa: em. jonathan: tighter or wider? mohamed: wider. lisa: tighter. jonathan: this time next year will janet yellen be the fed chair? mohamed: no. robert: i don't think so. lisa: no way. jonathan: thank you very much for joining us this week right here on bloomberg "real yield." the lone dissenter, neel kashkari will be on bloomberg daybreak: americas beginning at 9:00 a.m. wall street time on this monday. that does it for us. we will see you next friday at 11:30 new york time, 3:00 p.m. in london.

you have been watching bloomberg "the real yield." ♪

mark: from london, i'm mark. bonnie: and from new york, i'm

vonnie quinn. this is the european close on bloomberg markets. mark: we are going to take you from new york to london with stories out of berlin, washington, and china. here are the top stories we are andowing on the bloomberg around the world. angela merkel for the first time with donald trump. the german warns of they may retaliate against any new u.s. import tariffs. a global rally spurned by the president and markets are beginning to lose momentum. emerging markets having their best week in a year. theresa may could be days