jonathan: from new york city, i'm jonathan ferro. 30 minutes dedicated to fixed income. this is bloomberg "real yield." ♪ jonathan: coming up, the president'firs100 days. how the trump trade stalled the market. 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. why ecb president mario draghi -- we start with the big issue, why some investors are skeptical

about the president's tax plan. >> it is the starting point, it is the beginning of the negotiation. it is more about when does it happen, how significant is it? >> talking a good talk on tax reform, but they still have to walk the walk. there is still a big question mark over whether they will be able to push through the reform appeared >> i am not going to get excited about this one announcement. they're such division in washington that it is tough to see what we end up with. >> janet yellen has the prayer the possibility of of fiscal policy coming on. that puts everyone at a tremendous state of unease as to whether fiscal policy will come or not. >> 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 darn equal asian, which is how to begin paid for this? jonathan: joining me is jonathan byner, jeff rosenberg, and harry ishihara.

let me get to the breaking news really quickly. the senate clears the stop gap spending bill. we are set to clear that one hurdle on the horizon. jeff rosenberg, let's fold in the idea that we will get some phenomenal tax plan. someone please explain to me why the 10 year did nothing on the back of an announcement of these really big tax cuts. >> we are going to clear the hurdle for one week. the fact that that is a headline and we have to debate 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. and if you are having a hard time keeping the government open, it will be that much harder to do big, structural tax reform. jonathan: do you share that?

>> 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. as was said, it is all 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? the big range that we have been in since april, as low as 216, as high as 240. what will it take to break out away from this range and out of 260 with comfort and stay there? >> do i have to correct you again? jonathan: go on. >> we were higher than 240.

260. jonathan: april. john it -- jeff rosenberg, do we have to start again? the high for 2017. >> what was the question? jonathan: i am going to change to jonathan byner instead. >> can i say, you are doing a fantastic job. [laughter] jonathan: thank you, sir >>y through beuse everyone is skeptical. they are skeptical about fiscal policy, the economy, inflation, but the fed is not. we aren't so i think they will have to keep pushing and they will raise rates. i do not think much is going to happen at the next meeting but they will keep moving the rates higher and the market will have to believe it. jonathan: harry, every time yields go back up, farmers start taking a closer look in treasuries. talk about the japanese flows and have a story has evolved? >> last year they had what i am

calling a double whammy. they made losses on their hedges, excuse me, they made money on their hedges for the first half of the year and losses on the second half of the year. of course, after trump won, yields went up. the yen moved a lot so they had a double whammy perform on their portfolio. i have a graph on my screen. it shows the 23 weekly net flows of bonds. the first half of the year they are up therefore bond exposure but now they are cleaning up their portfolio. jonathan: what is happening over the next couple of months? >> after they finish cleaning up their portfolios, they will come back into form bonds. europe is attractive as well. the political risk and credit ratings are a hurdle on that

side. jonathan: what does this mean for the treasury curve? we are north of 200. is that the trade to keep? >> the flatten her piece, -- falttener piece, 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 ck 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 fundamentally an indicator of long-run inflation expectations. we had this period of european inflation expectations. it's all point to steeper yield curves. global central banks getting out of negative interest rates,

japan being a great inflection point for the global market means longer run steeper yield curves. we are positioned for the back end 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. pc was pretty much on the money for the federal reserve so when people start talking about the reflation trade is off, does the data tell you something else? >> the first quarter was not that great and has not been great for the past five years running now. the fed will look through the difficult first quarter gdp inventories. consumption was a little bit weak. it 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 the fed's favorite measure with respect to wages. there is a steady trend upward for wages. we had a tough cpi print. i think they will look through that as well. look, the reflation trade may have gotten a little over exuberant but now, it has gotten to the opposite in the spectrum and the markets are now being complacent as it relates to reflation. jonathan: looking at the eci print today, how significant was that for you? >> about inflation, we note that it is being driven by three factors. one is rent, health care, and gasoline prices. health care and rent are 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, where in the market is vulnerable now? >> there is a bit of tightness in the labor market and the cpi was a little bit weak. it is telling us we are at the point where you begin to see real acceleration in wage points. when you look at where wage expectations are, in terms of the flatness of the curve and what the market is pricing in, this is as you get past the dark clouds of a 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 there could be a bit too much complacency in their desk in where these yields will go. -- in where these yields will go. jonathan: where is that on the treasury marke >> we think it is more 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. we think it will happen within the next two years. the market now is pricing at something like two tightenings between now and the end of next year. if you look at the dots, the fed thinks six. 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 be back. 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." i'm want to head to the auction block, wrapping up the month. the first quarter was a hard act to follow. with over $100 billion sold, a late surge to close the month with more than 13 billion pricing on the final day.

on the sovereign side, the treasuries, $28 billion seven-year note drove it 8.4%. indirect bidders, direct bidders left with -- in europe, french election relief. raising $9.5 billion in a sale of 5, 7, and 10 year bonds. we are back with jeff rosenberg, jonathan bienner, and harry ishihara. i want to begin with euros -- eurozone inflation. this friday, in europe, north of expectations and jeff, the highest in almost four years on the core print. president draghi -- does he have the right approach? jeff: it is a risky approach because you are setting up a split between the data and what you are telling the market, and putting central-bank credibility on the line.

so we will see. clearly looking at the chart, it is telling you a clear message that the reflationary theme is predominant throughout most markets is showing up nicely in the european data. the tune from the ecb will have to evolve. jonathan: john, is the ecb falling behind the curve? is this just early data and the effects are going to fade as the months progressed? jonathan b.: the fed is behind the curve and the ecb is not. we are believers in the fact that this is transitory. they have had an uptick in headline inflation, a small pickup in core 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 that is going to make that core rate go anywhere close to what he wanted to be.

there is a clear trend toward higher inflation. you still have slack in a lot of the countries and even where you don't like in germany, you still don't see wage inflation because you have migration from other countries. our view certainly disagrees with the ecb's long-term forecast. they have been pushing down their forecast and we are below that so we think they are on hold for an extended time. jonathan: harry? harry: if you divided into the numerator and denominator, the earnings in the numerator is stuck in the range. but the denominator is trending down and is negative. that is what is driving headline average numbers. if you further break it down into sectors, we noticed the numerator is the driven by

sectors affected by the minimum wage increases, we feel. like retail, health care, etc. and also leisure and hospitality. on the hours side as well, retail is a huge drag. we feel those are the drivers. jonathan: look at the euro specifically and what has been happening with credit, 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 like we thought 10 to 20 years ago. >> we have to think about it within the fundamentals. credit spreads have tightened. what has happened in an environment of global zero interest rates and easing 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 has less than about the credit story and much more about the policy intervention. the big story, and i agree in -- i agree with jonathan in terms of the long run, there is a limit. 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. if you take away 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 maybe would not have been there if the ecb did not get involved. do they start trading like bunds? >> if those spreads get tighter and tighter, there is nowhere else to go, so they trade with the bund market. the ecb has had a big, depressing effect on spreads and risk premiums generally. 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 do think, i agree with jeff, witches you have sort of the extraordinary policies right now but you could 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. i think the ecb is going to be similar but they are several years behind. jonathan: i am wondering if the ecb will have a harder time backing away from their asset purchase program like the fed did -- van the fed did. -- than the fed did. >> when you withdraw from policy accommodation that you get much more financial condition tightening. both central bankers are going to go about that. i call it crossing the river by killing the stone.

they have no idea how to calibrate the withdrawal. they will do it very small and then stop and look around. that anybody panic? your point is well taken. i think the markets are quite concerned. >> i would say 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 they have tightened a few times and 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. i think they are behind from that perspective but i think the idea that financial conditions generally could tighten materially in europe is not something they will accept.

jonathan: you just wonder whether the redenomination risk is part of the market now. everyone will be sticking with us. we will be back. want to get a market check on where bonds have been this week, twos, tens, and 30's. yields higher up 9%. up by eight basis points on the week on the 30 year as we approach the 3% mark once again. still ahead, the final spread for the week ahead. 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 bloomberg's "real yield." it is time now for the finals red. coming up over the next week, the federal reserve makes it rate decision. the u.s. jobs report comes next

friday and we get the second round of the french election. we are back with jeff rosenberg, jonathan bienner, and harry ishihara. let's just wrap things up. looking ahead to the french election, is the risk fading now potentially? >> that is the case, that is the market consensus. we have had a lot of election surprises, but given that the polls were not incorrect in the first round, people are looking vested to the parliamentary elections. >> i agree. looks like macron is a done deal. never say never, but the polls have been right and they have him with a big lead. jonathan: a federal reserve meeting, a payrolls report. does it matter, the federal reserve next week? >> before the market? we are looking for a june hike. that should be the last one this year. jeff: all meetings are live but some could be more than others. jonathan: do you think they

should move up a rate hike anytime soon? >> i agree with jonathan's earlier comment. in terms of vulnerabilities in the five part of the bill because we priced out a lot of the fed hikes. if we are net -- if we are not there, we can have a repeat in march, which is to get the expectation closer. the markets are moving closer in that direction and june will be the focal point. >> i think the balance sheet might be a feature of the statement that the market may care about. they got it out there, but they may put it into the statement which would give it more validation. jonathan: i want to end the way we usually do with the quick fire around. one question and one word answers. a 1% gdp rate this morning on a first-quarter gdp, did the fate -- fed hike too soon? >> no.

>> no. >> yes. jonathan: 100 days later, 230. higher or lower in 100 days? >> higher. >> higher as well. >> higher. jonathan: long bunds or btp's? >> you would not let me go with neither so bunds. >> bunds. love them in the 30's. >> bunds. jonathan: upside or downside to pricing. jonathan: my special thanks. that does it for us. you have been watching bloomberg "real yield." ♪

♪ haslinda: today, we meet with a woman who was forced to take over her family's sauce company after her father died. just as business was picking up, she was faced with another death in the family. this time, her husband. the tragedies, though, have made her stronger, and she now runs a multi-million dollar operation. let's meet sin hwa dee's jocelyn chng. ♪