jonathan: from new york city, i'm jonathan ferro. 30 minutes dedicated to fixed income. this is "real yield." ♪ jonathan: coming up, the president first 100 days. the so-called biggest tax cuts in history fall on deaf ears. european economic optimism is surging as inflation surges to a four-year high. we start with the big issue, by some investors are skeptical

about the president's tax plan. >> it is the beginning of the negotiation and when does it happen? >> talking a good talk on tax or form, but they still have to walk the walk. there is still a big question mark. >> i am not going to get excited about this one announcement. they're such division in washington that it is tough to e wh we end up with. >> janet yellen has the prayer and possibility of disco policy coming on -- of fiscal policy coming on. >> we are going to talk about rate cutting that no one on the hill things we can get to at these levels. and we are not going to talk about the stickiest part of the whole equation, which is how to begin paid for this? jonathan: joining me is jonathan byner and harry.

the senate clears the stop cap spending bill. we are set to clear that one hurdle on the horizon. jeff, let's fold in the idea that we will get some phenomenal tax plan. >> we are going to clear the hurdle one week. the fact that that is a headline and we had to debate whether or not we can keep the government open, is why there is a lot of skepticism around big 1986-style tax reform. it is hard to do that. if you have a hard time keeping the government open, it will be that much harder to do big, structural tax reform. >> that is right. they will get something done.

we are still optimistic. but the plan that came out seems very optimistic. there is a lot of people within the republican party that are going to have a tough time buying into this, and have the deficit go up significantly. it is l about cutting taxes, but nothing on the other side. at the end of the day, some will get done, but it will be -- >> so early in the show. jonathan: let's get to josh, shall we? as high as 240. what will it take to break out away from this range and out of 260 with comfort and stay there? >> can i correct you again? jonathan: go on. >> we were higher than 240.

jonathan: jeff rosenberg, to be have to start again? the high for 2017. >> what was the question? jonathan: i will ask jonathan byner instead. jonathan: can i say, you are doing a fantastic job. [laughter] jonathan: thank you, sir. jonathan: they will have to push this through because everyone is skeptical. they are skeptical about fiscal policy, the economy, inflation, but the fed is not. i think they will have to keep pushing and they will raise rates. they are going to keep moving rates higher. jonathan: harry, every time yields go back up, form to start taking a closer look in treasuries. talk about the japanese flows and have a story has evolved?

>> last year, they had a double miami. they made losses on their hedges, excuse me, they made money on their hedges. of course, after trump won, yields went up. and then the again -- and then the yen moved a lot. they may have been double whammy on their portfolio. it shows there 23 weekly net flows. they are still playing up their portfolio. jonathan: what is happening over the next couple of months? >> after they finished putting up their portfolios, they will

come back into form bonds. europe is attractive as well. credit ratings are a hurdle. jonathan: we are north of 200. is that the trade to keep? >> it is a piece of the global flows when looking on the u.s. side. japan only pulled back in the u.s., but they pulled back out of europe. you have this political risk that dampened yields around the world and brought back a little concern around maybe there are bigger hurdles ahead of us. remember the steepening of the yield curve is an indicator of long-run inflation expectations. what we have assisted period of that's what we have is this period of european inflation expectations.

it's all point to steeper yield curves. banks getting out of negative interests rates. it means longer runs in steeper yield curves. we are positioned for the backend to be steeper. jonathan: let's talk about the data. it will be the slowest pace of growth in three years as the headline. the employment cost index was higher. when people start talking about the reflation trade is off, does the data tell you something else? >> the first quarter was not that great of the second quarter has not been great five years running now. the fed will look through the difficult first quarter gdp inventories. consumption was a little bit weak. looks like that is a first quarter phenomenon.

they will look through that. the fact that the eci was the highest since 2007 is pretty notable. obviously wage inflation and eci is a fed's favorite measure for wages. there is a steady trend upward for wages. they will look through that as well. look, the reflation trade may got over exuberant, but now, it has gotten to the opposite in the spectrum and the markets are now being place in as it relates to reflation. jonathan: looking at the eci print today, how significant was that for you? >> it is being driven about -- it is being driven by three factors -- rent, health care, and gasoline prices. health care and rent of the big drivers. the housing demand is very strong. the inventories are superlow. that is helping to drive rents up, but it is lopsided in our view.

in terms of pc, 70% of pc is driven by health care. that is a huge driver. we are always telling our japanese investors, it is consumption, but it is not what you think it is. jonathan: when people talk about complacency, jeff, when the market is vulnerable -- when is a market vulnerable a spark -- when is the market vulnerable? >> there is a bit of tightness in the labor market and it is telling us we are at the point where you begin to see real exhilaration in which inflations -- we are the point where you begin to see real wage accelerations at this point. as you get past the dark clouds

of the first quarter, the hard data that is again disappointing, what comes out in the second quarter is we are setting up for a nice rebound. and into that kind of environment, if there is too much complacency -- jonathan: where is that on the treasury market? >> it is on the intermediate part of the curve. there is still a debate on what is long-term, neutral. the debate will be ongoing for some time. when we think about the rates in the near term, we again think the market has taken out a lot of the tightening. the market now is pricing at something like two tightening between now and the end of next year. we think six is the right number. there is actually upside risk to that, which we have not had any long time.

jonathan: we will -- coming up, as inflation climbs, ecb president draghi is not changing policy anytime soon. this is bloomberg's "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg's "real yield." the first quarter was a hard act to follow. over $100 billion sold, a late surge to close the month with more than one billion pricing on the final day.

the treasuries, $28 billion seven-year note drove it .4%. -- 8.4%. in europe, french election belief. -- relief. we are back with jeff rosenberg, jonathan bienner, and harry issued our. this friday, in europe, north of expectations, just, the highest in almost four years. it president draghi -- does he have the right approach? jeff: it is a risky approach because you are setting up a division.

we will say. -- we will see. the chart is saying that the reflationary theme is dominant and showing up nicely in the european data. jonathan: john, is the ecb falling behind the curve? will the state away as the months progressed? jonathan b.: the fed is behind the curve of the ecb is not. we are believers in the fact that this is transitory. they have had an uptick in inflation. although their mandate is clinic the headline, obviously, they

look at core, and from our perspective, we do not see the inflationary pressures there element the corporate go anywhere close to what he wanted to be. you look at wage inflation here, there is higher wage inflation. you look at iraq -- you look at europe and you still have slack. in germany, you still don't have weight -- wage inflation because of the migration. this disagrees with the ecb's long-term forecast. we are below that. jonathan: harry? harry: if you divided into the numerator and denominator, the earnings in the numerator is stuck. but the denominator is trending down and is negative. that is what is driving headline numbers. we noticed enumerators are being driven by sectors affected by the minimum wage increases, we fail.

like retail, health care, etc. and also leisure and hospitality. retail is a huge drag. jonathan: look at the euro specifically. spreads are tight, tight, tight. i wonder at a time when the economy is going to pick up, how much tighter can things go in europe? we have to think about this back to front may be we thought 10-20 years ago. >> we have to think about it within the fundamentals. what has happened in an environment global zero interest rates andasing is

everyone reaches for yield. when you have negative yields in europe, you need that yield that is available in corporate bonds that much more. it is less about the credit story in much more about the policy intervention. the big story, and i agree in jonathan in terms of the long run, there is a limit. here we are not -- limit here. we are not having a huge deflationary dynamic. that drove the extraordinary measures. if you do not have the deflation, you don't need the extraordinary measures. you have real vulnerability in the pricing of valuation of corporate bonds right now. jonathan: you have an injection of interest rate sensitivity that may not have been there if the ecb did not get involved. do they start trading like bonds? >> if those spreads get tighter and tighter, there is nowhere else to go, so they trade with the bond market. the ecb has had a big, depressing effect on spreads and risk premiums without the ecb, you would see wider spreads and wider sovereign spreads as well.

yes, you are pretty fully priced in the credit market. i agree with jeff, which is, you have these for nearly policies right now, but you can make the same case for the fed five years after we no longer have an emergency, they are just now started to take those out. the ecb will be similar. but there several years behind. jonathan: i am wondering if the ecb will have a harder time backing from the acid purchase program -- tacit purchase -- asset purchase program. >> when you withdraw from policy accommodation that you get much more financial condition tightening. i color crossing the river by -- i call it crossing the river by killing the stone. they will do it very small and then stop and look around. that

anybody panic? your point is well taken. >> there are two things different between the u.s. and europe. the u.s., the problem is that has is the opposite of the problem they had a few years ago is financial conditions are too easy. they were so worried about financial conditions tightening back then, so they tightened, but they did not do it. now financial conditions are easier. i think they will push the envelope because they want financial conditions to tighten. europe has a problem called italy, which they can not back away, so they have this inflation. the idea that financial conditions generally could tighten materially in europe is not something they will accept.

jonathan: everyone will be sticking with us. we will be back. want to get a market check on her bonds have been. yields higher up 9%. up by eight basis points on the 30 year as we approach the 3% mark once again. next, the fed decides the u.s. jobs report in the second round of the french election. you are watching bloomberg's "real yield." ♪

jonathan: i'm jonathan ferro. this is bloombg's "real yield." the federal reserve makes its rate decision. the u. jobs report comes next friday and get the second the french election. we are back with jeff rosenberg, jonathan bienner, and harry ishihara.

let's wrap this up quickly. looking at the french election and the federal election potentially. >> we have had a lot of election surprises, but given that the polls are not correct in the first round, people are looking past it to the parliament tree elections. >> i agree. looks like macron is a done deal. never say never, but the polls have him with a big lead. jonathan: the payroll's report. does the federal reserve matter next week? >> it does not matter for the markets. we are looking for a june hike actually. that should be the last one next

year. -- this year. jeff: all meetings are alive, but some are more like than others could -- than others. jonathan: do you think they should move up a rate hike anytime soon? >> i agree with jonathan's earlier comment. we priced out a lot of the fed hikes. if we are not there to, we can have a repeat in march, which is to get the expectation closer. markets are moving closer in a direction. doing be the focal point. >> i think the balance sheet might be a feature of the statement that the market make your about. they got it out there, but they may put it into the statement which would give it more validation. jonathan: i want to record the program with the quick fire round. one question and one word answers. a 1% gdp rate this morning on a first-quarter gdp, did the fate hike too soon, yes or no question mark --? >> no.

>> no. >> no. jonathan: higher or lower in 100 days? >> higher. >> higher. >> higher. jonathan: long bonds or btp's? >> bonds. >> bonds. love them in the 30's. >> bonds. jonathan: upside or downside to pricing. jonathan: my special thanks. that does it for us. [ beep ]

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