♪ >> from new york city, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is real yield. ♪ big reflation trade becoming unhinged? -- vote on wall street has the vote in congress has wall street on edge. opec meets and the fed chair speaks with trot -- prime minister theresa may kicks off brexit negation -- negotiation's. we look ahead to next week. we spark with a big issue, is reflation trade deflating?

>> i believe the reflation trade is average. it is hidden air pocket. i think longer-term the reflation trade is still in play. >> the u.s. economy trucking along and commodities holding re.the it is on track. >> if you start to see the entire trump reflation trade coming into question. then you are looking at a potentially very significant down side. as long as that trade stays in play, you will see a time of record positioning that we have in the market right now. -- in the oil market right now. let's bring in our roundtable. >> joining us is the senior manager at aberdeen management. joining me is bob michael, let's kick it off with you. how dependent is this reflation trade on the administration's agenda and is it coming off the rails to some extent? >> i think it is important to the administration. they want more growth, they want higher paying jobs. i think the world has been

reflecting by itself. here is what we have been looking at. we have been looking at develop market inflation, reflation is all about the creation of inflation expectations. if you look at the white line, you see that a blend of the u.s., europe, u.k. and japan has picked up nicely after the last couple of years. the yellow line is china. look at where that is, that is over 7% year-over-year pti. ppi. you tell me where the lack of reflation is in this chart. it is there, it is powerful and it also tells you why janet yellen has questioned openly whether you need stimulus out of the administration. >> you see it in the data, i don't see it in the price. i know what you are looking at, michael collins, and that is breakevens. just rolling over. what is the message? >> the markets and to do a -- tend to do a pretty good job of just being forward-looking. i know the data we are looking at just on the screen are historical data. sure people the eyes are up, --ppi's are up. u.s. headline cpi is running at

2.7% year-over-year. it is going down. it is so high because oil prices are up 100% year-over-year and if oil prices to stay where they are that delta will go to 0% year-over-year. this is the tips curve, the break even inflation rate that is priced into tips. it is the difference in nominal yields versus real yields. these things are stock at 2%. -- stuck at 2%. you see out on the curve, fives, tens, and 30's are stock at two and coming down. the one year number, which is supposed to be a good gauge of one year inflation peaked at two and a half and is now below two, which is how cpi it will behave. >> a buying opportunity, your chart does not go back far enough. you have to go back pre-crisis, and that is what we are looking at here at look at this chart. you go back to 2004, you see that tips are supposed to be trading at around 2.5%. this is your opportunity to get in at under 2% and enjoy the ride higher. >> lou, we have a trade around the table at least as far as new york is concerned.

inflation andlong i would be there since china is going through the capacity cycle. but that changed last year, and i agree with the other guests that this is not a trump trade. this is a long run big push towards a higher inflation like -- plateau. it will not be hyperinflation, not with the way that dollars behave. but it is going up. i would rather be longer tips then a short tips at the moment. >> what i want to talk about is what is happening with beyond tips and have a look at what is happening in treasuries. you can look at bunds, and look at bloomberg --you can take the bloomberg index of treasury and look at what is underperforming. it is not treasuries. it is bunds. why is that bob michael? >> because the data coming out of europe is surprising everyone to the outside, but it should not be.

we have an enormous correction in the euro. based on how the euro has done, you would have expected manufacturing to pick up. you would've expected exports to pick up. you have a very accommodative central bank. that is what the market is starting to price in again. the question i would ask is johnathan: you have a fed talking about normalizing a balance sheet. potentially raising rates. a treasury market is resilient. my question is, the bond bears underestimating the structural forces that have driven down the euro for the last 30 years? >> i think we have already seen the bulk of the repricing in our treasury curve. our rates are 100 basis height -- points higher than they were a year ago. that is pricing in growth that is 1% better growth going forward on a permanent basis. if we have been growing at 2% a year for the last eight years, the markets are now saying maybe we will grow 2.5 or 3%, and we are not buying into that. the speculative forces our powerful -- are powerful. those are people like us, bob

and i, baby boomers who eventually want to retire and need more income. insurance companies and pensions plans are dying to buy bonds at higher rates, and now they have an opportunity. that continues to push yields down. >> they are going to be fires -- buyers of everyone -- 25 basis points. baby boomers are going to look for income all the way until we get to 3.5, 4% on the 10-year. there is no way a negative real yield on the 10-year is the right policy. if we look at the back up in yields, pre-election we were 185. we are 55 basis points higher than that now. since the election the fed has , raised rates twice 50 basis points. i wonder he back up in the 10 year is only a reflection of what the bed has done. johnathan: when you think about that as well you talked about the reflation phenomena. let's talk about growth. gdp does not have a free hand, .

when you look at the atlanta gdp forecast, it is a one handle, lou. the excitement in the stocks data, the sentiment survey, the hard data does not catch enough. give me the why. >> there is always a lag, sure. and that atlanta fed forecast can be pretty volatile. i think there is always the pauses, always the pause -- it is starting to catch, employment is very very tight in the u.s. and getting tighter from here. you will see inflation going higher from that perspective, even if you can get inflation from china on top. growth is fine, getting too concerned about the short run sentiment indices when there is so much going up with politics is the wrong idea. >> thank you for challenging the atlanta fed. i did not see the correlation there. i told john that i am from philly. i am looking at the philly fed. the correlation of the philly fed to the same gdp data, you

see it is a very tight correlation, and it is telling you that gdp is going to pick up. johnathan: the trade overall, do you want to do long treasuries michael collins? >> yes. i think at these levels you are you are supposed to arrow on the side of being long. johnathan: bob? >> you keep selling rallies here. johnathan: lou? >> michael can have mine. [laughter] johnathan: everybody is sticking with it. coming up, our banks getting ahead of a consumer crunch? why the amount of outstanding commercial and industrial loans dropped by the most since from 2010. new york city, this is bloomberg. the real yield. ♪

johnathan: from new york city i am jonathan ferro. this is bloomberg the real yield . in a time when investors are getting on to riskier aspects, big banks appear to be getting more skeptical about lending to individuals and businesses. according to federal reserve data, banks have reduced the amount of outstanding commercial and industrial loans for the most sce 2010. on the consumer side, banks are tracking more delinquencies and losses on credit card and also -- and auto loans. credit card lenders increased charge off rates by the most sense 2015 in february, while -- since 2015 in february while banks are tightening up on risk-taking and individual investors have been plowing into riskier securities. what is the story that data provide to aspire, let's talk a little bit about consumer credit. back with us on the roundtable is lou hick more, michael collins. michael, you look at that story. the banks seems to be lining up,

. reconcile these two things. >> retail investors are not always a good gauge of foreword looking marketing. they tend to pile in near the end of rallies. i think you are seeing a little bit of that now. i would not be surprised to see continue flows into equity and risky assets as we crest. on the bank side, they were burnt in 2008. i think they are being disciplined. they are seeing small pickups in delinquencies and write offs even ford today noted the residual values on their car loans are starting to come down, used car prices are coming down. they are being more cautious. i think that is a good sign. in past cycles, you have seen the banks go full steam ahead into a crisis and they are pulling back in a timely manner. johnathan: is this the right time for them to be pulling back? is this the right time to be looking at subprime auto loans? >> we've pretty much like credit across the board and certainly we like banks.

because of the regulations, banks are forced to raise capital and then invested -- invest it largely in risk was serities. they are a good value and we continue to invest with them. consumer loans are interesting. there has been an extension of credit. it has been intermediate some of the lenders have intermediated the banks. you are looking at wage gains which are accelerating year-over-year throughout 2.8%. last year, they were only up about 1.5%. as long as you see the wage in, credit quality gets better, not worse. jonathan: lou, what do you think of that kind of dichotomy that is happening, when we see banks tightening things up and investors remaining loose. >> this comes back to a question about what the fed does. we have seen the peak of consumer credit quality and we think we are coming down the

other side a little bit. but the risk is around the affordability of payments, which is very easy at the moment. these three hikes we get this three nexte new year, maybe the bank is getting ahead of that. that doesn't mean you don't buy auto loans, you just buy auto loans with really good credit. rather than the ones that are further down the capital stack. jonathan: is that a good trade, bob? >> i don't think so. i think you go down the capital stack. i think we are seeing the central banks normalizing rates, they are leaning into something and what they are leaning in is growth and inflation. what do you say to that lou? >> that makes a market in a way. i would rather have better quality investment at the moment. that's not going to have an awful lot of capital volatility. so it can come back to the market in the next year or two when spreads are wider the further down it looks more attractive than it doesn't the

-- does at the moment. i'm looking at quality trades. >> i think there is a nuance happening, underneath the data. looking at average credit quality of consumers can be a little bit misleading. i think the consumers out there have moved into a bifurcated camp. i think we saw some of that at -- in the election, the fact there was so much disappointment and unrest socially in the country and globally. i think a lot of the banks and some of the more aggressive, private lenders have moved into that lower quality raunchy -- quality tranch of consumers. that's where you are seeing the losses. i think the people the banks want to lend money to don't need the money necessarily. >> the beginning of 2016 the trade was to go along the curve and down the capital structure. that is not the trade anymore. why is it still the trade on the capital structure side? >> it is the trade on the capital structure side because

you still have a tremendous amount of accommodation from the central banks. lou talked about the fed raising rates this year and next year. you would think that we are already at some neutral rate of 2% or 3% or 4%. we are it three quarters to 1%. that is a lot of accommodation. you still have central bank balance sheet at what, 16 trillion dollars. you still have a lot of central banks printing $150 billion a month, and buying bonds. all of that provides credit. all that spills into bonds. all of that has a dampening effect. i d't think you fight back. >> i want to get specific real quickly. take the bloomberg high-yield index and chop it up and just do the year to date performance. what you see is the underperformance has come from retail. do you want to buy some some prime auto or go long retail

that way? >> what you are looking at in the retail actor is a transformation, the way people shop. you are not only seeing it in corporate bonds, you're also seeing it in the commercial mortgage-backed securities market, where you are looking at big mall properties. you are seeing who has the egg old stone brick and mortar , anchor tenants. most people go in and they look around the store and they see what they want to buy and then they go home and they buy it off the internet. that is the problem with big box retail and a lot of the struggle the retailers are facing. that is not the issue in the auto industry. >> i have a charge on here on of -- chart on year of high-yield spreads, this is the spread on the whole height yield index. it looks like it has been going straight down, but but if you squint you see it is widening, just over 50 basis points and -- in the last two weeks. from those almost cyclical we had. 50 basis points happens all the time.

if you look at retailers and energy names they have widened more than the market. >> what kind of pushed back are we looking at? >> another 50 or so get back to the 500 550 level is pretty bullish. we have been selling this, but it has been tightening. we have pulled back a little bit on the selling here with the 50 basis point why they. -- widening. >> i think you are too greedy. i don't think there is enough in the high-yield market that you can correct again. you had energy correct one year to 18 months ago. those companies with oil all the way down to the mid 40's, they are ok. surprisingly, heth care was on -- wasn't on the list of underperforming sectors this year. because they underperformed last year. there is not a whole lot left other than retail to underperform. the money will go in and end the cycle high yields through 300 or over 400. jonathan: the debate will continue. we will all stick with it. let's get a market check.

treasuries reap -- two year treasury yield big. we are down six basis points from the week so far, 125 through the curve, 40 am a -- on the 10 year. coming up the final spread. the u.k. set to trigger brexit and opec oil ministers meet in kuwait. this is bloomberg the real yield. ♪

♪ jonathan: from new york city for our viewers worldwide, i am jonathan ferro. this is bloomberg, the real yield. it is time for the final spread, a full agenda coming up over the next week including an opec meeting this weekend. and the u.k. set to trigger two years of brexit negotiations. speaking of opec look at this chart. even though crude has not recovered to its 2014 levels, the bloomberg barclays high

yield energy index pricing crude is still at $80 a barrel. i want to talk brexit and energy. i want to bring in our guests. michael beginning with you. looking at the energy sector, have these companies underlie that index enough to warrant -- done enough to warrant what the spreads are? >> they have done a lot. they have done a great job generally speaking, cutting their dividends, raising cash, issuing equity in some cases, consolidating. but, they are still a lot of risk in the high-yield energy space. if you look at the average spread on energy bonds, it is not much higher than the height yield index energy. you are not getting a big premium for the volatility of the commodity. there is a credit we are looking yesterday they have a bond, a , terms of leverage. they have a bond trading $.70 on the dollar. if oil stays at 50, the bond is worth that. if oil goes to 40 you get a

goose egg, no recovery at all. that is a lot of volatility or uncertainty in the underlie day -- underlying asset value of that company based on the price of oil. jonathan: don't you think that a -- >> don't you think that a lot of the weak issuers have already defaulted out of the market? i look at what's left and i think it is the better quality issuers. i think they have gone through the restructuring. the weaker ones are out of the index. when we look at what the cost of shale production is, it has come down from the 60's to about $40 a barrel. companies can make money here. >> the thing i am worried about is that the budgets of gone from being cut to being ramped up. i don't think we have ever seen such a v-shaped recovery and a -- in a sector that had just gone through a brutal recession. it usually takes two or three years for an industry to get back on its feet and they have done it in 3-6 months. now they are ramping up production aggressively. jonathan: lou i want to give you a chance to speak. looking at this situation in the united kingdom the day after

, brexit mark carney wanted to buy yield bonds and you said he can't have them. can have them now? >> yeah, he can. i'm quite worried about the u.k. i sneak a suspicion the growth problem won't come through till next year. we are seeing the early foothills with real pressure. the u.k. consumer starting to feel real wages come under a lot of pressure here. had a conversation about the hike in rates. is that a one-off or is that the spread on the mpc? >> i think it is probably a one-off. leads this year and she has been very strong on a recent paper where she said uncertainty had no impact on growth.

which is very much at odds with what has been said recently. i don't think we get any rates news. there is a good chance we might get its next year if we are right about inflation. >> i don't want to touch them. i think as the fed raises rates, you have the ecb talking about dialing down qe further and we think they will raise rates next year. the bank of england isn't going to go it alone. jonathan: i will wrap up the whole of the last 30 minutes with a rapidfire question round. i'll ask questions, one word answers. treasury yields, year and higher or lower. ? >> higher. >> michael collins? >> lower. >> bowens are treasuries, which outperforms? >> treasuries. >> michael? >> treasuries.

>> retail credit, long or short? lou? >> short. >> michael? >> short. >> bob? >> short. >> guild, by or sell? >> sell. >> michael? >> sell. >> bob? >> sell. >> gentlemen, a privilege. thank you very much for joining us. a programming note that next friday we will be back at our regular scheduled time at 12 p.m. in new york, 5:00 p.m. in london. from new york that's it for us. you have been watching bloomberg, the real yield. ♪

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