♪ jonathan: from new york city for our viewers worldwide, 30 minutes dedicated to fixed income. this is bloomberg "real yield ." up, chair yellen has a plan to unwind a $4.5 trillion balance sheet. the u.s. economy's first quarter was not so miserable after all but a big upward revision fails to shake treasuries. opec, whatever it takes falls on deaf ears. with a big issue, chair

yellen's campaign to make the fed boring again. >> predictable, slow, and as boring as possible. noted that market participants had anticipated their expectation of balance sheet reduction but that the market has been able to absorb that. there is a comfort that there won't be a reinvestment taper tantrum. knows how to calibrate interest rate increases and their effects on the economy. no one knows how to calibrate a billion dollars of balance sheet reductions. what impact does that have on the economy? tois the fed back to trying make markets feel comfortable again? were they shaken by last wednesday's selloff so much that we are back to the old fed, or will they tried to lead markets? jonathan: joining me around the table is greg peters, bonnie and in st. louis we

have brian railing -- brian rehling. brian, i want to begin with you and talk about this issue around the balance sheet. will it be as boring as the federal reserve suggests and hopes? brian: absolutely. do whole point for the fed's not use the balance sheet reduction is a policy tool, in my opinion. they used it once they wanted to drive rates lower and the point is to get out of this with no disruption. jonathan: this will not be a policy tool for those hoping they would move on balance sheet and pause on rates. will they be disappointed? gregory: i am sure. i am not sure it will be as boring as the fed thinks. it introduces each fed meeting into play. they are talking about slow and steady but at the end of the day , they have to readjust, and

what happens when the economy is,s down and the signaling we need to actually reduce the number, not increase the number? i am not as convinced. annie: i think the fed did very good job in communicating a well-thought-out plan, and this increasing cap structure is one that gives a lot of credence to the market. target participants have been grappling with it and it puts it at ease. treasury maturities being very lumpy in 2018. with this cap structure we know that will not be an issue. it assures the market there will not be asset sales, so if there was a fixed amount they had to buy if there were not enough mortgages prepaying, with a be selling mortgages into the market? they will not do that. if there will be some episode where we have a flight to quality treasury rally we will see a bit of a countercyclical balance under the structure.

jonathan: i sat down with mohamed el-erian a few years ago and he said this will be the loosest tightening in history. yields still grind lower on ten-year treasuries. why? gregory: you look at the balance of data, it has been mixed. an upward revision of the first quarter but it is still at the same kind of trajectory we have seen the past few years, 2%. i think the inflation number is key. in my mind, inflation peaked in february so the fed is doing anti-qe. we have had all of this stimulus thrown at the u.s. economy and we grew 2%. what happens in an anti-qe type of environment when inflation is subsiding and coming down and growth is not on the same track that many thought? i think that is your answer of why yields are where they are. jonathan: are the treasury

there's going to have a tough time for the rest of 2017? innie: i think so -- brian: think so. i think we are range bound. the previous guest was spot on, it is the inflation story. while the survey-based measures are taking up, you look at the long-term market-based measures of inflation and they are starting to trend a little bit a quite low level so i am not sure why the fed is in such a hurry. jonathan: are we going to stay in this range of 220, 240? if you get to 240, you fade reflation and if you get to 220, you buy reflation. is that what you expect? bonnie: we would expect volatility to remain low. you have got geopolitical risk that will keep ceilings on yields as well as low global interest rates. we still have negative yielding

debt. that is going to be a factor to prevent yields from rising materially. on the other hand, growth has not been great but it is ok. the idea that we should be a lot lower in treasury yields, it is a challenging one to put forth. jonathan: at the start of the year we had an aggressive short and treasuries and i want to pick out the speculative positioning on the 10 years because it has changed. we came in with a big record short. jeff gundlach asking the igs,tion, when this chart z should use that? do you have to go the other way to think about where the positioning is? >> it does not change the fundamentals of the trade so you are talking about 10 to 20 basis points. at the end of the day, the

longer-term trends are in place that i think serve as a range bound type of existence for 10 year yields. jonathan: what do you make of that, the consensus has often been wrong in the treasury market over the last couple of years. will it continue to be so? brian: probably. i think the market will be relatively calm for the balance of the year. the market has a funny way of surprising us. jonathan: i ask this question on almost every show every -- every show. have we seen the low? i am going to ask you the other way, have we seen the high on the 10 year yield this year? bonnie: with respect to the low, that is not something we can answer is there are still a lot of geopolitical risks that could push is below 2.16 so i think something as asset managers, we should not try to protect.

whether yields could rise higher , i would put the chances on meaningful fiscal reform this year. i think they have diminished in the market is coming to grips with that. to think that yields could go a lot higher than 275, i would definitely take the under. jonathan: greg? gregory: let's just talk about election night. like0 year, when it looked the trump administration was on its way to winning, the 10-year hit 170. i think that helps define the range. i am not saying 170 is the right number, but sometimes that snap reaction and directionality is more proper than a month later. jonathan: you think we could get back to 170? gregory: not necessarily, but i think there is a gravitational pull down to those levels. not a lot has changed since then from an economic standpoint, and

inflation readings were more positive at that point, from introductory standpoint. jonathan: bonnie? bonnie: going back to the positioning and futures, the fact that it is cleaner makes these moves less so we may not see as much volatility because the positioning is cleaner. jonathan: do you agree with that, brian? we talk about the treasuries and the domestic u.s. economy but we have not talked about what the ecb might do on the back half of the year. what will that do on the treasury market? brian: in an average year, the 10 year treasury trades at about 120 basis point range. either the higher or lower getting taken out some point this year. we will see which way it moves, but i do not think we will trade in between those levels for the rest of the year. in terms of your other question, yes, absolutely, international

yields have been an anchor. the ecb, i think they have learned a lesson from the taper tantrum in the u.s., so look for them to be very cautious and measured as they slowly roll back their language, and eventually taper into next year. i do not look for quite the market reaction we saw in the u.s. because i think they have learned some of the lessons. bonnie: we would agree with that at western asset. we have seen growth improve and the eurozone. european credit, especially with respect to the banking sector but with respect to ecb action, they will be very cautious. medium-term stability at or below 2%. the rise in inflation they have seen, they view that as transitory and they know a lot of that has been driven by energy and do not expect that to continue. ,f you look at wage inflation

in the peripheral countries the wage inflation is zero. the only places you have decent wage growth is germany and the netherlands. so for them, they will remain on the current path. we do not see them reducing their purchases for quite some time. jonathan: if you had to hold 10 ds or 10 year treasuries, which would you hold? bonnie: we think treasuries hold more value. jonathan: greg? gregory: same answer. jonathan: brian? brian: same answer. still with us are gregory peters, bonnie wongtrakool, and brian rehling. yield."bloomberg "real ♪

♪ jonathan: i am jonathan ferro, this is bloomberg "real yield." the u.s. treasury with three main offering so far this week. i want to focus on the $34 billion 5-year note sale. 23% of the total, the least and about a year. look at the movies, the pipeline for those bond sales dropped. --continue is a borrow continues a borrowing slow down in the money market. where there has been no slowdown was in the u.s. high-yield, the

biggest week for issuance since march. thanear to date total more $120 billion. here with me in new york is greg peters and bonnie wongtrakool from western asset management, press in st. louis is brian rehling. for the first time in about a saying,eard somebody there is no alternative. it has been 12 months since i heard that kind of language, there is no alternative and that is why i am buying this stuff. does that concern you? brian: there is a lot of complaints in the market, no doubt. volatility is very low so there is not a lot of focus on risk. asset prices where they are, you have to buy something. there is no alternative, is that what is really driving spreads tighter even though issuance has picked up? gregory: i do not think it is a

new phenomenon personally. that has been they qe trade, crash interest rates to force investors off the risk curve. vol isious aspect, that low as a consequence. issuance has been high but to stick with the high-yield market , the benefit and high-yield over the past couple of years relative to investment grade corporate has been the issuance. the has not been a lot of issuance in u.s. high-yield but there has been a ton on the investment grade side. jonathan: something greg mentioned, the qe trade. we are still talking about the qe trade. why? bonnie: you have to differentiate between the stock and the flow effect. there has been so much duration taken out by qe and it will take a while for the whole to fill.

are there other alternatives, are people buying because they have to? i think valuations are a lot fuller than they used to be, particularly in high yield. we have taken some of that exposure down and moved it into bank loans. i think there still are good opportunities out there in not just bank loans but emerging markets. the active managers there are opportunities that remain at this point. jonathan: do you share on bank loans? gregory: i am much more skeptical and i like u.s. high yield better. if you look at the refinance 60%ity, it is 50 percent to and there is downside but no upside. theie: i would concede culpability is a negative for the sector but when you look at the spread in high yields historically it is on the tighter end. it is a floating rate asset and we are in a fed hiking cycle

makes it more attractive. jonathan: we had an opec decision to extend cuts for nine months. [no audio] so aggressively this year. brian: ever since last year's , the as oil rebounded correlation eventually broke but i think this is just another testament to kind of the overall high-yield market, whether it is straight high-yield or bank loans, etc.. coupon,re buying the the income stream and there is not much concern about risk. there is not a lot of price

upside risk so it is a coupon clipping market at best. if the conditions were volatility stays low, interest rates stay relatively low, economic growth is ok, you can continue to clip that coupon, but i think if those more positive economic conditions he would i think probably be better off in some other asset classes where you have some price upside rather than taking a risk in the high-yield market. jonathan: bonnie? bonnie: i think we are more constructive on oil -- energy prices. we had a global oil task force that put together a couple of years ago, and the expectation was that oil would trade in the $45 to $55 range. that is pretty comfortable. a little bit predictable so the volatility is taken out of the market, a good thing for high-yield although we prefer it

in the investment grade space. jonathan: let's look at high-yield and break it down by sector. the underperformance has come from most retail associated sectors and managing as well. where do you want to pick up the pieces? gregory: i think the interesting thing about energy at the start of the year, a traded right on top of the high-yield market so there was no risk premium built in. we are actually still worried about high-yield companies in the energy space, so access to capital has helped balance sheets limp along. ,he retail side is definitely this year's energy. we are broadly of warning that. we think health care is a much better sector to play. jonathan: on the energy side, is there the risk of complacency now that we have the opec put

that some of these shale producers will not carry on with the cost-effectiveness? gregory: complacent this -- complacency is being built in but they can limp along forever as long as the have access to capital, so the bridge to financing is still there. stops" and"the music they do not have the capital when things go awry. jonathan: you will be sticking with me. let's get a market check on where bonds have been, twos, tends, and 30's. yields grinding higher. the two-year up to. we creep slowly back toward three percentage points on the 30 year treasury. still ahead, the final spread. draghi speaks, the u.k. prime minister race speaks at -- heats up, and we get jobs numbers on friday. ♪

♪ ferro.n: i am jonathan from new york city, this is bloomberg "real yield." time for the final spread. mario draghi will be speaking to the european parliament just a week and some change away from another ecb decision, as the market starts to look to what the ecb may or may not do with the quantitative easing program. we will be looking ahead to the election. theresa may and jeremy corbyn ramp up campaigning, and on friday, the payrolls report in the united states. let's bring in the roundtable one time -- one last time. gregory peters, on a long, and brian railing -- bonnie wongtrakool, and brian ringling. unemployment keeps grinding lower. where is the wage growth? very slow to come about

and probably will continue to be so. that has been a problem for the fed. i think he goes into those inflation expectation numbers that are trending slightly lower. the jobs report has to be a total disaster for the fed not to move in june. june is pretty much set. jonathan: greg? gregory: same answer. the numbers matter a lot more than payroll. we were joking, pce is the new payrolls. i think payrolls are slow and steady and there is no wage growth, and real wage growth is still negative. jonathan: i want to wrap up with a look into next week and wrap up the conversation with a rapid fire around. one word answers only. the u.k. election on deck. or theresa may?

gregory: long may. bonnie: may. brian: may. jonathan: have we seen the high for 10 year treasuries? gregory: yes. bonnie: yes. brian: no. jonathan: does opec comply with the latest cuts? gregory: no. bonnie: yes. brian: no. jonathan: payrolls, upside or downside? gregory: upside. bonnie: upside. brian: upside. jonathan: that does it for yield." you have been watching bloomberg "real yield." ♪

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vonnie: from bloomberg world headquarters in new york, here are the top stories on the bloomberg and around the world that we are following. in markets, u.s. stocks are little changed ahead of memorial day holiday weekend. bouncing between gains and losses since the longest rally since february. the u.s. dollar erasing declines as the second reading of gdp tops estimates. oil is reversing its biggest loss in three weeks. investors tempering the reaction to opec extension of supply cuts. i was in a novak tells bloomberg television that producers have more tools to further support prices if thes needed. president donald trump distant from key allies at the g7 summit after a frosty