jonathan: coming up, a candidate you have probably never heard of spooks investors one way -- treasuries rallied for a fifth straight week. yields dropped and the fixed income trade continues to revive earnings on wall street. the greatest concerns about the economy. we start with a big issue, white left wing candidate in france, bloomberg bond -- bloomberg bond market. >> he could actually be very dangerous because he is anti-europe, anti-euro, anti-austerity, and he could enact that with the national assembly behind him. >> the fact that most of the landscapes are there, the ideas we have for future of french politics will be different from the past. >> the market was not thinking it would be a four-way way --

four-way race. melenchon shakes that up. captioning that story on the bloomberg, the amount of mentions of his name on the terminal so far. mention,o mention, no and then out of nowhere, it is all about melenchon. here with me around the table in new york city is the head of fixed come etf portfolio management. advisors. great to have you with us. i want to begin with you very quickly. another candidate to get concerned about. give me a reason to purchase french bonds at of the first round. >> the one thing we know is that we do not know.

if we have learned anything from brexit or the trump election, it is that they are having a with theseime movements. we're trying to find some type insurance, u.s. treasuries probably being the easiest one. u.s. treasuries are probably morehan likely doing better. inathan: on the other side, just wonder who is the most market friendly candidate to come into the second round? >> i think what we saw from the market reaction, le pen is actually the more market butndly potential candidate interestingly, we saw what happened in the u.s. when the news mentions go up and the candidate rices quickly. market reaction at least in terms of some volatility was

impressive. perhaps if you look at the french equity market, volatility is not that high yet. jonathan: in the bond market, we captured that story. you see the spread, the spread keeps blowing out, blowing out, blowing out on 10 years at 70 basis points. , youkind of political risk talked to me about what you are seeing in european high-yield the time of this political uncertainty dominating for at least several months. >> the good news there is you are fairly valued by my analysis. you can look at the spread between the european high-yield index and the u.s. high-yield index. i do some further massaging on that because you have to adjust for a major difference in the mix between the two markets and even after adjusting for that,

trade wider on average. worrisome if you were in a stage where europe was significantly overvalued, then you would be more vulnerable to a shock. jonathan: where is the biggest risk at the moment? 92 basis points or in credits, the corporate space question mark -- space? carl: i would say european credit is overvalued versus the u.s., despite a little tighter, the risks are a little greater. it is hard to pine values with 20 basis points. jonathan: what do you say to the idea that it is overvalued more than the u.s.? >> you are covering a wide range. my work really focuses on the high-yield sector. now, the u.s. is a little hard to engage in itself. you talk about relative value

and you are talking about abnormally low interest rates here and valuations on credit being a little hard to gau. >> when you talk about technicals and the central bank balance sheets and the indirect or direct impact on markets, the fomc has had an indirect impact, bringing the whole thing down. the ecb has purchased investment grade corporate debt. we talked about the policy down the road, that may be more impactful. jonathan: where is the biggest distortion in europe? in the sovereign space where you bonds at0 year twentysomething basis points, 10 years and 90 something basis points, and even the likes of 200 basis points, incredibly low nominal he it where is the biggest distortion? you could make an argument

either way. opinion,overvalued, my probably on the margin, the sovereign space a little more. it is just too low. jonathan: the big question around this table is whether you want to be active or passive. last week, a lot of active managers saying it is time to be active. as a guy who sets up ecs, you can find a reason to be passive right now? without hedging my response, using fixed income etf's, it does not mean you are a passive investor. you can look at the lineup on bloomberg and search for fixed income and cank at the lineup and there are a wide variety of produs in a wide variety of spaces. you can get longer duration or shorter just in a diversified passive toward folio. you can go into u.s. high-yield,

shorter duration high yields, shorter duration investment grades, emerging markets, etc. asset allocations using etf's and that is a big way fixed income etf's are being used. they are being used actively to set up in income portfolio. jonathan: what is your response? carl: i believe in active management. we have too many built-in advantages of the bond index is about 75% government or government related securities. if i put together a portfolio that yields more than the benchmark, i win more than three out of four cases. spreads widen a little bit, iich does not compensate, and still win. moreover, when securities are taken out of the index, i don't have to sell at that price. a great example is november 2015, a large high-yield issue points inds are up 15

the month of december. it was never that bad and never that good the index had to sell down 25 points. jonathan: what do you say to that? franc: two things. one, index funds or etf buses are not full reputation -- replication strategies at least in credits. .or a large issuer like that that is true. a fixed incomeve strategy that is passive that .ctually buys bonds like that that is a passive strategy you can look at historically. the merrill lynch index has been around for 13 full calendar years, a market index for 11 of those years, and the index is a lot of asset managers.

i would differentiate between going outside the box and active management. those are two different concepts. the other point is the notion out there that this year will be a better time for active managers because correlations are down, i have done this work only in high-yield but the funds line is active outperform an the market goes down and underperform when the market goes up. nothing to do with correlations. it is because they are less and somewhat more conservative than the indexes. >> the growth of the fixed income etf's has largely been by institutional investors using etf's in a complementary fashion. these are tools, as i mentioned.

they can be used to make adjustments to an overall portfolio duration, and obviously some of the efficient trading and cost efficiencies are attractive. jonathan: you will be sticking with us. , fran rodilosso, and martin fridson. coming up, another rough week for the bonds. from new york city, you are watching bloomberg "real yield." ♪

jonathan: from new york, this is bloomberg "real yield."

we did see auctions pick up on the sovereign side. for 10 year and $12 billion for 13 years. looking closer, a yield of 2.94% with a ratio of 2.3. lowest since november. supply, those are getting extra energy as the trump bump moves to bonds. the market responds with lower yields. we're back now with carl , andtaedt, fran rodilosso martin fridson. carl, a fundamental change for the markets? the president says he likes road -- low rates? carl: everyone wants low rates. they are determined by fundamentals not someone's anion. you have to be very respectful of the international sector here

, a 225 u.s. 10 year might not be interesting to someone in the united states but to someone in frank for it or tokyo, it is terribly interesting. fran: yes, i agree with carl except in a way, i like higher rates. i would like a normal rate environment. in the u.s., we are a lot closer to that than japan or europe are. would like to see the set of conditions that encourages likely to morehe hikes this year. jonathan: we have had this for a long time in 2017. my question is as follows. is it technical -- an inflection point where we start to grind lower? >> i think the rates are fair. we are dialing back of the optimism.

it is pretty fair. high-yield u.s. is incredibly overvalued or the -- ear to 20, does that -- it is based on intople regression, taking account credit availability, economic conditions, interest been, and the question has raised, historically, low rates meant the economy has been week. of course, your model would show the markets being rich under these conditions because interest rates are being held artificially low. period,ut the earlier and the market is still expensive just within that expensive not that from a historical perspective

but still expensive. jonathan: does it look like that to you, carl? carl: i would say it is fairly value. balance sheets are still healthy. you have to be respectful of the fact that spreads have come a long way. you have got spreads at narrow levels. we have taken selective profits in our credit portfolio but still positive about corporate america. >> going up in quality, if you are concerned about credit in general, you better stick to the higher end. ,he downswing will be greater not to say that higher quality is cheap, but you will just have less while there. fran: you get greater interest quality.n you go up in there has been compassion throughout the credit curve. i think it is rational at this stage. aboutan: the decision

being a long high-yield it where do you stand on that argument currently? towe are subsector specific we would like the banking sector, we don't like telik mitigation's, we don't like pharma, we like energy. our head of investment grade credit likes to say, lend money to someone who does not need it, don't lend money to someone who does not need it. jonathan: a great slogan. do you see the breakdown at the moment? >> looking at the overall picture, we compare spreads on emerging markets, high yield, and u.s. high-yield, introducing further processing on that to adjust for the difference in ratings mix in those two indexes. emerging markets even after that adjustment, it is always wider than the u.s. and the question .s how much wider

right now, not enough. >> what proxy are you using for emerging markets? high-yield credit? >> yes. >> yes. i want to highlight within emerging markets, people talking about going into debt, talking about dollar sovereigns, dollar court friends -- within the credit sector alone, credit sector high yields, is higher quality than the u.s. it is harder for many emerging market issuers to earn the rating. the fact that you get that and the spread over high-yield and on average shorter duration, those are tractive features. u.s. high-yield spread has narrowed over the last year. , likes make it appear most high-yield markets, not particularly cheap. jonathan: where do you stand on high-yield?

for a couple of years, high yield was moving pre-much in lockstep with crude oil price. backed off. we are not seeing as close a correlation. if you were to see a drop off, anything like we had, getting down to half of where oil is right now, it would still be -- high-yield would still be vulnerable. looked at inflows and outflows, high-yield etf's, following the market quite closely for some time. a little decoupling. you are not seeing inflows as energy prices rise. at a level getting toward the mid-50's where people were very happy when we got to the low 40's in energy prices for a large number of producers, particularly in the higher end of the spectrum. more specifically,

energy and emerging markets? about energy in terms of where it is on the business cycle, energy just came out of recession. everything in energy company is doing today has become more credit worthy and improved a balance sheet. we like energy, both investment grade and high-yield. jonathan: you are sticking with us. carl eichstaedt, fran rodilosso, and martin fridson. a check on where the markets treasuries,is week, yields grinding ever lower down three basis points so far, 10 year yields down by 10. program, then this final spread. u.s. bank earnings, president trump met the italian prime minister and the french election. we will look at head, from new york, you are watching bloomberg. "real yield." ♪

city, i: from new york am jonathan ferro. this is bloomberg "real yield." you have got earnings like goldman sachs, the earnings continue here on wall street. a week that concludes with the first round of the french election next sunday. we are back now with western asset management's carl eichstaedt, fran rodilosso, and martin fridson. i want to begin with you, carl. of uncertaintyt we have on the horizon not just next week but beyond, a few were to put one trader trade on the table, what would it be? carl: being long u.s. duration is an easy one. against a lot of bad outcomes, whether it is coming out of france or the u.s. i like the long restoration and the long emerging markets. but and a good 2016,

awful 2013, 2014, and 2015. brazil, mexico, russia. >> we need to focus on income investing, looking through a variety of sectors, preferred is a big component of it, some of the more specialized categories there. i like emerging markets but i actually like the local currency space. sold off hardso during the election but that like many currencies had a brutal 2012 22015. yields averaged 6.5%. companies like result of lowered fall and theye have a long way to go.

martin: i would say there is uncertainty on the geopolitical front. a very dire situation in venezuela right now. there are always things to be worried about. jonathan: even after the french election. i want to say thank you and wrap it up. give me one word answers. bonds, go.d tease or carl: both. martin: oh atp us ease. fran: oat's jonathan: long inflation? long treasuries or long credit? carl: both. martin: credit. fran: credit. jonathan: high-yield?

carl: a tough one. em. martin: high-yield. fran: em. a programming note. sitting down with bloomberg's alix steel in a few minutes, discussing natural gas and the global energy summit. for us.s it next week, we go back to friday, 12:00 p.m. new york time, 5:00 in london. you have been watching bloomberg "real yield." ♪ so you're having a party?

how nice. i'll be right there. and the butchery begins. what am i gonna wear? this party is super fancy. let's go. i'm ready. are you my uber? [ horn honks ] hold on. don't wait for watchathon week to return. [ doorbell rings ] who's that? show me netflix. sign up for netflix on x1 today and keep watching all year long. ♪

vonnie: live from bloomberg world headquarters in new york, i am vonnie quinn and this is bloomberg markets. liquefied natural gas is changing quickly thanks largely impart to new sources of u.s. shale supply. is demand expected to grow? looking at a boom bust cycle. alix steel at the energy summit at the university in new york. we are here at the center on a global energy policy in the hall. the pioneer of the energy, he terminal,, lng import in front and center. the company is now the first to export lng in the united states. now chairman, started the company about a year ago. a pleasure to talk to you.