♪ from new york city for , our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "real yield." ♪ coming up, a left-wing candidate you have probably never heard of spooks investors when we from the french election. the president likes low rates. yield strong. the fixed income trading revival continues to drive earnings on wall street but muted loan growth is concerned about the con -- the economy.

why the left-wing candidate in france is spooky the bond -- spooking the bond market. >> you could be dangerous because he is anti-europe, anti-euro, anti-austerity and with the national assembly behind him. >> the concern is the fact that most of the landscapes or ideas we have for the future of french politics will be different from what we have seen in the past. >> it was not supposed to be a four-person race. now he shakes that up. >> the most uncertain election in a very long time. jonathan: it seems we cannot concern a certain candidate nchon. mele you see this spike, no mention, no mention, and then out of nowhere it is all about mele nchon.

here with me around the table in new york city is --, head of fixed income portfolio management. and cio -- great to have you with us. i want to begin with you very quickly. it is another candidate to get concerned about. give me a reason to purchase french bonds ahead of the first round. >> one thing we know is that we don't know and for us to commit client assets based on the outcome of an election is imprudent. if we learned anything from brexit or the trump election, pollsters are having a difficult time so we try to find some type of cheap insurance, u.s. treasury is probably being the easiest one. outcome, u.s.bad treasuries are more than likely doing better. jonathan: we have had this big support for u.s. treasuries.

who is the most market friendly candidate to come into the second round? le pen or melenchon? what is the likelihood of macron? is that lehave seen pen is the more market friendly potential second-round candidate , but interestingly we saw what happened in the u.s. when the news mentions go up. the candidate rises quickly so i think the market reaction, at least in terms of some volatility, was impressive. perhaps if you look at the french equity markets, volatility is not that high yet. jonathan: in the bond market we captured that story. you see the spread, it keeps blowing out, going out on 10 years at about 70 basis points. that kind of political risk in a sovereign space, talk to me about what you are hearing in european high-yield in a credit-based at the time of this at theal -- credit space

timef this political uncertainty? carl: the good news is you are fairly valued by my analysis. you can look at the spread between the european high-yield index and u.s. high-yield index. i do some further massaging on that because you have to adjust for a very major difference in the ratings next between the two makes -- mixkes -- , and you tend to trade wider on average. where is the biggest risk at the moment in europe? credit,e euros or in the sovereign space? carl: i would say european credit is a little overvalued versus u.s., the risks are a little greater, and it is hard

to find value in bonds in the 10-year basis point. jonathan: what do you think of that? fran: you are covering a wide range. my work really focuses on the high-yield sector. now, the u.s.ight is a little bit hard -- martin: the u.s. is a little bit hard to gauge in itself so talking about relative value, low interest creditnd valuations on being a little bit hard to gauge. >> i think when you talk about tech goals and central -- technicals and central-bank balance sheets, impact direct or impact on credit markets, the fomc has had a direct impact. the ecb has purchased

investment-grade corporate debt and as we talk about central banks unwinding policy down the road, that may be more impactful. jonathan: where is the biggest distortion in europe? in the credit space or in the sovereign space? of btp's, 200 basis points over bunds. where's the biggest distortion? carl: i think you can make an argument either way. due to ecbervalued buying, in my opinion, but on the margin the sovereign base is just too low. jonathan: too low for stock in the sovereign space so the big question is whether you want to be active or passive. last week we had a lot of active managers saying it is time to be active. ,s a guy that sense of etf's you give me a reason to be passive as a fixed income investor. fran: i think without hedging my

response, using fixed income dts, even passive ones -- etf's, even passive ones does not mean you are being a passive investor. , andan look at the lineup there are a wide variety of products and a wide variety of spaces -- in a wide variety of spaces so you can get longer or shorter duration via etf's just through a passive portfolio. emerging markets, etc.. you can make asset allocation decisions using etf's and that is a big way fixed income etf's are being used, used actively to set up an income portfolio. jonathan: carl, what is your response? carl: i really believe an active management. we have too many built-in advantages. the bond indexes about 75% government or government

related, very low yielding so if i put together a portfolio that tighter, ieads are win, spreads are unchanged, i that do noteads -- compensate for the kerry, i win. i do not have to sell at that price. a great example is november 2015, petrobras was removed from the investment-grade index and in the month the bonds were down 25 points. in december they were up 15 points so it was never that bad whenever that good, but the index had to sell down. jonathan: what do you think of that? fran: one, index funds were etf's are not full replication strategies. they can't be, particularly in the credit space. manager inagement --

a space like that will not hold on to petrobras. we have a fixed income strategy that is passive that actually buys bonds like that, u.s. fallen angel bonds which petrobras was a fallen angel. that is a passive strategy that you could look at historically. the index is a merrill lynch index that is been around for 13 full calendar years and has outperformed their broad yield market index for 11 years. jonathan: marty? martin: i would differentiate between going outside the box and active judgment. i think those are two -- active management. those are two different concepts. the notion 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 bottom line is that the act of funds outperform when the market goes down -- active funds outperform when the market goes

down, and that is simply because they are less volatile. some are more conservative in that sense them the indexes. >> i am going to point out that the growth of the fixed income dts, van eck, -- fixed income etf's, are bailey is a complementary faction -- fashion -- mainly in a complementary fashion. obviously some of the efficient trading and cost efficiencies are attractive. jonathan: you will be sticking with us. coming up, the auction block, a big week for treasury issues but another rough week for the bond bears. you are watching bloomberg real yield. ♪

♪ i am jonathan ferro. from new york, this is bloomberg really old. i want to held to the auction. the auction cycle in the united states as $24 billion auctioned and 20 year note and 12 billion in 30 year. looking at the 30 year bond sale , it had a yield of 2.9% with a bid ratio of three -- 2.3, the lowest since -- the president says he likes low rate. the market responds with lower yield. we are back with caramelized that -- great to have you with us. carl, let's begin with you.

is that a fundamental change for the market, should you get a reprice on treasuries because the president says he likes low rate? carl: everyone wants low rates. they are determined by the fundamentals, not someone's opinion. you have be respectful of the international effect where 2.25 u.s. 10 year may not be interesting to someone in the u.s. but in frankfurt or tokyo it is terribly interesting. fran: i agree but in a way i would 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, but, and i would like to see a set of conditions that encourages the fed to do most likely, two more hikes this year. jonathan: we have had this range

for a while through 2017 and we broke through the lower end of it yesterday. is this an inflection point where we start to grind materially lower on treasuries? carl: i think rates are pretty fair and i think the bond market has reacted rationally. the markets have sold off a lot on trump optimism. we are dialing back that optimism. i think a 2.2 510-year is pretty fair. jonathan: you have this thesis that high-yield u.s. is incredibly overvalued. does that complicate the thesis? martin: not really. the judgment that the high-yield market is expensive is based on multiple regression models, taking into account credit availability, economic condions, interest rates. the question has been raised, historically low rates has meant the economy is weak so your

model would show the market is being rich under these conditions because the interest rates are being held artificially low. i threw out -- throughout the earlier period i looked at the data from quantitative easing through now and the data is still expensive, not as expensive if you look at it in a longer historical perspective but still expensive. jonathan: do things look that expensive in the united states? carl: i would say the credit market is fairly valued. balance sheets are still healthy but you have to be respectful of the fact that spreads have come a long way. we have been taking some selective profits in our credit portfolio but we are still positive on corporate america. jonathan: marty? martin: going up in quality, if you are concerned about credit in general you will stick to the higher end, because the

downswing will be greater in the lower quality, not to say that higher-quality is cheap. you will just have less price exposure. fran: you have greater interest rate sensitivity in all likelihood when you go up in quality, so it depends a little bit about your concerns but there has been compression throughout the credit curve, so a higher quality approach is i think rational at this stage. jonathan: it seems you have a decision about either being long em or high-yield. where do you stand currently? carl: we are very subsectors specific. we like the banking said her, desk sector, don't like telecommunications -- sector, don't like telecommunications, like pharma. blend money -- jonathan: do you see the same sector breakdown? martin: looking at the overall picture, we compare the spread on emerging markets, high-yield

and u.s. high-yield, and then do some further processing on that to adjust for the difference in ratings mix in those two indexes. and emerging-market, even after that adjustment, is always wider now the u.s.. the question is how much? andt now, not enough emerging markets are very expensive relative to u.s. high-yield. jonathan: do you agree, fran? fran: what proxy are you using? high-yield credit? martin: yes. fran: i wanted to highlight with an emerging market, people talk about going to em debt. they could be talking about dollar sovereign, dollar corporate, or local currency sovereign. within the corporate sector, emerging-market high-yield is "higher-quality" than the u.s.,

and it is harder for many emerging market issue ways to earn that rating. the fact that you get that in a spread in the u.s. high-yield over a shorter duration, those are attractive features, but the spread u.s. high-yield has narrowed over the past year which makes it appear like most high-yield markets, not particularly cheap. jonathan: where do you stand on energy? martin: that remains honorable for a couple of years -- it remains vulnerable. for a couple of years it was moving in lockstep with the crude oil price and it has backed off. if you were to see a drop off anything like we had getting down to half of where oil is now, high-yield would still be far herbal. jonathan: -- vulnerable. jonathan: fran? , they are-yield etf's following the oil market quite

closely for some time and now a little bit of decoupling, not seeing the inflows as energy prices rise. now we are 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. jonathan: what is the bullish case for energy credit, more specifically energy markets? carl: if you think about energy in terms of where it is on the credit cycle and business cycle, energy just came out of recession and everything they are doing is becoming more credit worthy, improving the balance sheet. we like investment-grade and high-yield. jonathan: you're sticking with us. want to get a check on where the markets have been this week. yields grinding every lower --

ever lower. 10 year yields down by 10. still ahead on this program, it is the final spread. it is the first round of the french election on the weeks calendar. from new york, you're watching bloomberg real yield. ♪

♪ jonathan: from new york city for our viewers worldwide, i am jonathan ferro. this is bloomberg real yield. you have earnings from the like of goldman sachs and earnings continue on wall street. concluding the first round of the french election next sunday. carl, i want to begin with a look ahead to next week. give me where you have some conviction, given the amount of certaiy we have not just

week but beyond. if you were to put one trade on the table, what would it be? carl: the long u.s. duration is an easy one because it is the policy insurance against many that outcome. i like being long u.s. duration and long emerging markets. they had a good 2016 but remember, they had an awful 2014, 2015, 2015 so i think there are still some undervalued names. martin: we focus on income investing and looking through a variety of sectors, preferring the big -- biggest component within the reit's. not the shopping mall type of reit's but more specialized categories. we still would see some value. fran: i like emerging markets but i like the local currency space. when you talk about being beaten

up over the past several years, mexican peso hit hard during the election and they had a brutal 2012 32015. yields in that asset class averaged 6.5%. brazil has lowered rates 300 basis points since the fall. they have a long way to go. reason,: that is for a marty? martin: the uncertainty on the geopolitical front, a very dire situation in venezuela. there are always things to be worried about. jonathan: even after we get through this french election. i want to wrap things up with a quick fire around where i ask a series of questions and you give a one word at. or bunds? tease or long

martin: oats. fran: oats. carl: oats. jonathan: fade or long inflation? treasuries or credit? carl: both. jonathan: marty? martin: credit. jonathan: fran? fran: credit. jonathan: long high-yield or e.m.? carl: e.m.. martin: high-yield. fran: e.m.. jonathan: my thanks. that does it for us. next week we go back to friday, 12:00 p.m. new york time, 5:00 p.m. london. you have been watching bloomberg real yield. ♪

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