jonathan: from new york city, i am jonathan ferro, with 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ jonathan: coming up, the biggest crisis of the trump residency rights the calm -- breaks the column on wall street. willie chaos in washington throw chair yellen off? thought one impeachment in brazil was

dramatic, markets brace for two in a row. we start with wall street. >> ultimately, you want to have a functioning washington. we are still the most important government and economy in the world. if that comes to a screeching halt, that is not good for anyone. >> that is the thing we have to gain. people need confidence that this administration can deliver. >> if he wants to keep everybody happy, he has to do real policy stuff, not just tweet. >> this trump trade we have all embraced has driven markets to new highs in equities is coming to an end. >> the trump trade is great for newsrooms and like reality tv playing out in politics, and reality tv has a short-term nature in terms of politics. i think investors will take this in stride. jonathan: joining me for the

next three minutes is matthew hornbach, morgan stanley, lisa abramowicz of bloomberg radio, and james barrineau of schroder investment. , i want to begin with you. how much of the trump element in the reflation trade has drained from the markets? matthew: if you look at the 10-year treasury yield, it has come down a bit. one of the ways i like to look at it is looking at term premiums. that is a nice measure of how people are looking at the trump presidency and its affect on markets. quite a bit has come out of the market, a little more than you would expect if you just looked at the 10-year treasury yield. i like to look at our 10-year treasury term premium measure, and what you can see is we have taken out quite a bit of the

postelection jump in term premium. jonathan: lisa? lisa: you can look at the two-year, 10-year spread. it is narrowing since the election. that is a good measure of how the trump trade has been of operating. bond markets have not bought into this quite as much. jonathan: we will get to the curve in just a moment. fading the fed seems to be the story of the week. the ultimate move in september rolling over, is dating the fed the right thing to do? matthew: i think it is too soon to say for sure. stories are hitting the tapes with frequencies we are not used to. our view is that the fed will hike rates in june and continue telling the markets that they are going to probably try to get another one in this year.

emerging markets more broadly, we have seen a favorable market from the treasury, the federal reserve, and maybe one or two more moves through the rest of 2017. when you factor in your unfolding view from the federal reserve, do you see a complacency from the federal reserve and the amount of moves this year? james: i do not. the key asset nice and emerging markets -- asset price in emerging markets is the u.s. dollar. we have been somewhat aggressive with the u.s. dollar. a weaker dollar historically is always great for emerging markets. this is a virtuous cycle period where inflows are coming in, currencies are appreciating, central banks are lowering interest rates, growth prospects are improving, so we are in a good spot. jonathan: lisa. lisa: i am struck by the

optimism not reflected in some of the numbers from the first quarter. i am looking at the household debt numbers we saw yesterday, showing consumer debt has reached an all-time high, $12.7 trillion in this chart on the bloomberg. this is important at a time when we see the liquid sees and loss of increases -- liquid sees -- delinquincies. this will signal slower growth going for it. this should factor into expectations. jonathan: let's get to the president of the st. louis fed. the financial reading since march has moved in the opposite direction. is there something in that argument? i know a lot of viewers will be thinking he doesn't really have argumentut can that

reached the fomc? the bond market is facing a gradual rate of rate hikes already. clearly, if the fed continues to hike rates at the pace medium anticipating, he might not be happy with that. jonathan: what is the message in the yield curve? we have broken 100 basis points. we are going down towards 90. is there a message in the curve? lisa: the more they hike, the more the long-term growth is going to come down. the economy is not accelerating right now. jonathan: you see a steeper volving runl -- e here? they are going to have to start cutting interest rates again. this is what they are telling us

they will do in the face of another downturn. lisa: are you saying the yield curve is going to steepen because the that will have to lower interest rates again? matthew: they will keep the intermediate sector of the curve much longer than you expect. lisa: you think there will be a near-term downturn? define the near-term. when you look at one year or two, there is only some probability of recession. the markets will always put some probability on a recession when you look two or three years out, and when you look at the new york fed survey, that is what market participants are telling the new york fed. 20%wo years, there is a possibility that the fed will have to revisit the lower bound. jonathan: i was talking to someone earlier this week, and he said the fed made the phone call. they wanted to find out why the market was reacting to the drama in d.c.

what was your view on that? matthew: at the end of the day, there are stories coming out that are making people question the longevity of what the administration is going to put through. expecting progress on health care reform, expecting progress on tax reform, and i think all these convocations may extend the timeline. investors get worried when you talk about extending the timeline. jonathan: breakevens have been rolling over. spreads are getting flatter. there is a story there away from whatever is happening in d.c. at the beginning of the year, i was told the trump trade did not begin, reflation did not begin until the middle of last year. the trump trade inot what is ending, it is the reflation trade. have we reached peak reflation already? if you look at the

reflation index since the election, which we go back a year or so, you can see that there was already a ramp higher in these measures of inflation rates. timism sincemistop then. it has gone sideways. jonathan: five months ago people would have pointed to china. they would say look at the trajectory. things are starting to not rollover dramatically but flatten out. for our viewers, give me the view on china. james: china had a great first quarter. objective iseening to broaden the economy. they have their hands on so many

sectors in the economy, they can toggle credit growth. we had a good first quarter. now they are scaling back credit growth of it. they are very focused on stability. they have done a great job. you can see that through the currency aspect. jonathan: can you have that steeper curve story without a china?na -- a buoyant absolutely. when the fed reduces their balance sheet, the fed is going to have to make up for that. coupon prices are going up. that could cause term premium on the back end of the curve to rise. complex.hink it is i wrote a story about that, and i got a lot of pushback on that. it is not so clear. jonathan: what are the arguments? lisa: first of all, you have an aging population piling more into long-term debt.

it is political to increase the deficit. any rolling off of the balance sheet would be so glacial, it would have no effect. these lead to not that big of a move. matthew: i think we are talking about two different time frames. over the long-term, interest rates will find it hard to move higher. our forecast for the 10-year at the end of the year, is 250. i'm not looking for higher interest rates myself. jonathan: i keep asking this question, have we seen it yet? matthew: it depends on what the administration will get done by the august recess. coming up next on this program, it is the auction block. forstors in brazil bracing impeachment, the sequel. this is "bloomberg real yield."

♪ from new york, this is "bloomberg real yield." i'm jonathan ferro. we want to head to the auction block, where apple had its first euro debt sale 2015. $2.8ech giant raised billion to fund share buybacks, dividend payments, and expansion plans. $11 billion of 10-year tips march the biggest share in data is 2003. in brazil, the political data around president temer pushes on

sales. for months, investing in brazil has been a breeze. that changed abruptly amid reports that president temer authorized illegal payments to a lawmaker that authorized the impeachment of his predecessor. ofh me is not quarterback morgan stanley, james barrineau of schroder investment, and lisa abramowicz of bloomberg. you talked about how much of a surprise this was. jim: the market reacted like it was a shock. this is brazil. there was always been a taint around him and this massive uncertainty since the corruption scandal, which is now two years old began advancing. there was always a suspicion that it might reach into temer, and now it seems like it might

be confirmed. lisa: you talk about the market reaction, and i am talking about the change in brazil, if we look , you can see the blue line is the cost to insure against a brazilian default in the next five years jumping towards the white line, argentinian credit default swap rates. argentina has defaulted seven times on its external debt. we have brazil jumping to nearly the same level for the cost to protect against default. it seems like a pretty important move. jonathan: overdone? jim: if you look at my screen, you can see what the currency good. it was limit down for most of the morning. we think it is overdone because of what lisa's said about credit default probabilities priced into the market.

it essentially wiped out the credit cycle from the central bank. clearly inflation is on a structural decline in brazil. it is going to take a pretty negative series of events and a lot of noise over a long time to get the central bank markedly change their rate cutting cycle. all of a sudden we did get a little bit of value opening up in brazil. jonathan: everyone that came on bloomberg tv and radio said b uy em's and brazil. we saw funds rushing in, money going in, money going in, money going in. the question for a lot of people, for the tourist in this market, when does the brazil story become a sell em story? in brazilhe tourists see a headline like this, and they don't want to explain why they have 1% of their core class

in brazil, so it is easier to sell assets and ask questions later. for dedicated guys that are looking for relative value among some realf em's, value opened up because currencies have been on a one-way ride for about 16 months. lisa: you say opportunities opened up, but not that many. flows out of emerging markets among the biggest etf's were not that severe. you can see this is the gap between yields on emerging markets investment-grade debt versus u.s. market investment-grade debt. it has collapsed. people are getting the smallest extra premium to own emerging-market debt since 2013. does this sound alarm bells? matt: what i find alarming is we think u.s. investment-grade spread treasuries are already

too tight. you're talking about a double whammy potentially for emerging-market credit spreads. we focus on the u.s., and we think at some point the bell will told for u.s. investment-grade debt. jonathan: what do you say to them about em? jim: there is not an asset class on the plan that is really cheap. we still have a relatively robust spread to the global government bond. we wiped out a lot of currency overvaluation in em. now we have not percheap currencies, but cheaper

currencies. look at real yields emerging markets versus developed markets, there is a tremendous gap. there is still value. jonathan: i keep going back to 2013, can they really get on a balance sheet reduction path at the federal reserve without jim's world seeing significant trouble? matt: i think the fed's view of the balance sheet is a tool they want to use in a passive way. they want to set it and forget it. if we get a couple more rate hikes this year, that is what they are going to start doing in 2018. i think the fed will get the balance sheet to move lower. jim: it always depends on market expectations if they can begin to unwind it in a rational manner, and treasury yields the jump, it has the potential to be a nonevent for em. jonathan: matt hornbach, lisa

abramowicz, and james barrineau. yields lower by two basis points on the 10-year. eight basis points on the 30-year. we are pulling back. it is the final spread, the week ahead. the trump tour in europe. you're watching "bloomberg real yield." ♪

♪ from new york city, this is "bloomberg real yield." time for the final spread. over the next week, president trump makes his first overas trip, which includes nato and g7 meetings. the fed will come out with meetings minutes from their last

meeting. we will get a g7 summit later in the week as well. back with us is not back, lisa abramowicz, and jim barrineau. over the next week, whatever you fancy, what are you looking for? matt: we are looking for more details on how the fed intends to wind down its balance sheet. are they going with treasuries and mortgages, only mortgages? we will get more details on that and hopefully the pace on which people are expecting that to come down. lisa: people are focusing on the balance sheet. perhaps they will look at the risk factors. perhaps it will come too late for the risk factors. jonathan: how much time is left report is too late for an exit plan? matt: they are looking to get information as soon as they happen, get out your a want to tantrum.ther taper

jonathan: there seems to be a consensus on rates. where do you think there is a lack of consensus around the exit of the balance sheet? matt: it is the size that they want to get into and where it will be at the end of 2018. you can go from a $200 billion reduction in 2018 to a $600 billion reduction. lisa: there is a big question about the political backdrop. jonathan: that's the week ahead. let's get the rapidfire for you now. we have some quick questions. one word answers only. the first question is, will the fed back off from a june hike? matt: no. lisa: no. jim: no. jonathan: treasury curve you'll steeper are flat. matt: flatter. lisa: flatter. jim: steeper. jonathan: e.m. --

long trumpovocative, fiscal reforms or long temer? matt: temer. lisa: temer. jim: temer. jonathan: that is not what i expected to hear. matt on back, and lisa abramowicz. we will see you next week. this is "bloomberg real yield." ♪

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from bloomberg world headquarters in new york, here are the top stories around the world. the s&p 500 is gaining for a second session following the biggest seller of the year on wednesday. crude above $50 a barrel now. optimism opec will reaffirm output cuts next week. jim chanos tells bloomberg he thinks teslas stock is not worth a whole lot and he says that the opportunity for shorts in the u.s. is expanding. we have experts from that interview. in today's pursuit, one of the worlds top collectors. he will explain how