-- another political chalk in the k. prime minister may's conservative party loses its majority. the ecb is going nowhere fast. a picture of a better eurozone economy with limited price pressures and contingent convertibles in spain.

we start with a big issue, and other political surprise in the ua -- in the u k. >> the old rules don't apply anymore. may be a few surprise faces, i think with them is this community wants -- what the business community wants to see, the economy at the top of the agenda. always obvious this unnecessary reckless austerity was going to have an impact. will see going forward, the big thing is it's really weekend mays hand in these brexit negotiations. >> what bargaining power has she got? the conservative party has a right under the british constitution.

but she has no legitimacy at all. >> i think this will make it difficult tbaain hard. >> let's bring in our roundtable. atior investor and manager aberdeen and scott taylor, deputy see a.l. of fixed income and -- joining us from california is the global head of fixed income. great to have you with us on the program. capturing the votes as they came through. just to see this was real. see weren't expecting to 314, 315, and 317. story, the conversation has shifted whether or not you get a softer brexit.

justified? here.eal risk harder for her to negotiate. a bigger noise. >> the fallout was really united kingdom, hardly any spillover whatsoever. the negotiations are taking place in the next couple of years. >> it is a result no one expected. i think the challenge is going to be now the u.k. has to renegotiate free trade within e rest oeurope

the government that doesn't have a majority now has to form a coalition government. uncertainty is not good for the markets. >> if i said to you hung parliament, would you have said 10-year gilts yields? >> what is she going to give away in the median term of fiscal send -- fiscal spending. it's a very messy situation. midpoint and labor. actually think it could have

more because of this issue around the softhearted breakfast -- hard brexit. >> what you make of europe's -- make of your resilience? >> the shift to fiscal spending, loosening of the austerity have in through the last two years of a lot of political noise. to move the market on the tough political income. until monday. jonathan: the curve has shifted lower. the market is held by foreign investors. you expect the repatriation story to evolve over the coming months? >> the challenge is the central bank has to do more heavy

lifting because there is a lot of uncertainty. the reaction of the market is not unusual. the first thing that goes is the currency. one could argue the future is highly inflationary for the u.k. as the pound gets weaker. the central bank's job becomes more difficult because you have to deal with weak currency, uncertainty, and lack of growth. what you have is uncertainty on repatriation, immigration, trade, so i don't see gilts selling off any time soon. i think it makes everybody's job more difficult, and the reaction to the currency is right on. jonathan: the boe, conversations over the coming quarters, are they going to be uttering the word stagflation? >> i am not sure you will get stagflation.

inflation is now slowly rising to what banks are wanting it to be. if you look globally, it is only the fed trying to slowly normalize rates. everywhere else, everybody is still easing. everywhere else, they are struggling with growth and traction, and we are 10 years since the global financial crisis. jonathan: genius move, isn't it? have a referendum, make sure it is a mess come and hold an election as well. >> we will see how consumers respond to all of this. it just might be that it settles down a little bit from what has been a tough couple of months, a tough first quarter in the u.k., who knows? it will give us something to talk about. jonathan: a big week. everyone sticks with us. coming up on this program, santander steps in, raising questions for the $181 billion coco bonds market.

that conversation is ahead. this is bloomberg real yield. ♪ ♪

jonathan: from the city of london, i am jonathan ferro. this is "bloomberg real yield." european regulators decided banco popular of spain, debt was wiped out, senior bondholders protective, and authorities over today run on the bank. w a textbook succs for the regulator, and captured by

the chart, but what about the investor? scott, a success for the regulator, i see that. is there a warning for the investor before they can go in and take a nice 11% coupon come across their fingers, and hope it never gets triggered. >> it is a wake-up call for investors. for subordinated bank bond investors, they have to be aware of the risks they bear for the higher coupon. this be with which the regulator took care of the situation, obviously there was a takeover as part of the deal. that is extraordinary as well. jonathan: it happened quick and there was a question whether this was a test of the cocos.

the idea is you suspend coupon payments before the bank fails to keep the bank functioning. what was it this week? what was the take away from the first real workout for the securities? >> scott is right. if you think about what risk you are taking, you are getting paid a high interest rate. these are contingent convertibles, which means they convert into equity as a bondholder at exactly the wrong time. wh the bank or instition is in trouble, these bonds get converted to equity and you potentially lose capital, but that is the nature of these bonds and investors have to understand they are getting paid a huge amount of premium to buy this debt, and the pace and how quickly it happened, something like $2.2 billion of cocos have lost their value, i think people need to be aware of of what they are getting into.

jonathan: can you do this with the bank that is too big to fail? can you do this in italy, where the holders of cocos are not institutional investors? >> that is the point. how do you test the wider market. they were held in a restricted number of accounts. these are the ones that have been heavily sold into asia. that is a different set of circumstances. i would like to think they would then trigger through the coupon and you would see it coming as the capital ratios fell. it was a very convenient one to get sorted out quickly. it smelled of the old theo e sorting it out under the carpet. jonathan: where else do you go if you look at single b's and

compared to where cocos are, you are almost pushed up there or down the capital structure. isn't that the real take away here? in europe, there aren't many places tgo >> negative yields in germany, like you said, for mom and dad investors to get any income, they have to take more risk, and the question is how much risk are they taking to get that additional income. what investors have to remember is that these are want like instruments that trade more like equity, and equity markets can be more volatile, so you are almost doubling up your investments if you own equities and cocos, and when there is a run on the bank, the only concern is think careful and understand what you are investing in before you go in for that coupon that is higher than the cash rate.

jonathan: we can paint a bearish picture for your quite easily given how tight spreads are. what is the bullish case? >> it is the punch bowl full and not drained out anytime soon. this investor behavior that is consistent with buying higher-yielding securities, there is of substitution effect of selling negative yielding government bonds, and that has been promoted by the ecb as we saw this week. it does not surprise me that we don't seek and cajun because everything else was so effectively locked down by monetary policy. we should look at the market as it evolves through time. the spanish bond market has been weak, and italy is the big story there, but it is monetary policy at the ecb that is pedal down.

jonath: the ecb't buy nk debt and would imane t would be better if the ecb stepped away. is there some insulation away from the ecb? >> look at the european bond market, the spread is 110 basis points, but the yield is 85, but the bonds underlying it are negative. a yield hedged corporate on market does not seem like such a bad idea in the context of the european market, but obviously it is encouraging investors. the ecb is not buying high-yield emerging markets. jonathan: we also saw it in the book for the at tying 30 year, 22 billion euros for an italian 30-year at a time we are told

the eurozone economy is starting to outperform the united states. why are people getting aggressively long italian duration? >> you're getting aggressive at the 30 year unless you want to leverage up. they have as many political problems to come in the next year as we have been through in the last couple of days. there is up 40 basis points negative depot rate in europe. people are taking it, taking it, taking it. you get a bit of a spread there as well. what they need to do is change their mandate. mcs guys. jonathan: if i offered you a 30 year in italy with a 3.5% coupon come is that something you would be interested in? give me a thesis around the career death in europe right

now. >> not really. as you guys are mentioning, the european economy is starting to approve. remember you are locking in your money for the next 30 years. some big geopolitical issue or massive equity markets, people want that duration. but that is a hard call if that will happen. jonathan: where in europe in the fixed income space, and you can go anywhere, are you constructed anywhere? would you get long anything? >> europe is really difficult for us. as mentioned earlier, rates at

the short end are negative, so every bond issued out of germany is a zero coupon, so you are guaranteed to lose money if you hold to maturity unless you pick up investment grade corporates. it is difficult in europe to find via you unless you go down the credit curve, but the risk is the further down you go, the harder it is. we find more if i you and parts of the u.s. jonathan: we will get to the u.s. shortly. you are sticking with us. a check on the market and bonds, grinding higher wi-fi basis points on the two-year and 10 year, up six basis points on the 30 year the final spread, the wake ahead, a rate decision, including the fed. you are watching "bloomberg real yield." ♪

♪ jonathan: from the city of london, i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. outside the french parliamentary elections, a wave of central-bank decisions. a hung parliament, prime minister may hangi onto power. confirming right now that chancellor hammond wl remain the chancellor in her new. a swiss central bank decision and the boj as well. a look ahead to break it down, let's begin with you.

but sketcher thoughts on the fed. 10 year yields have rented new lows in the last couple of weeks, 2.14%. is there a message in the curve for the federal reserve? >> bond markets have been rallying. equity markets have gone up, so bond yields falling, equities going up, one of the two is wrong, and the fed as well. the fed would like to start raising rates. every time they start to do it, there is an external issues stopping them from doing it. there is a 95% chance they will go 25 basis points next week. i think it is one and done for the rest of the year. jonathan: a lot of people are saying the treasury's market is one of the most mispriced

markets on the planet. is there anything to like about treasuries right now? >> fixed income is the most mied rice because of the intervention of the central banks printing money and buying debt. 10 year treasuries, you should trade the range. i think i would be longer 10 year treasuries than shorter because i think the equities are too euphoric on what you will get from the trump administration. i think it there is a disappointment, there is a correction and equities. jonathan: how much is left to discount from d.c. and the treasury market? >> three if you're optimistic about the total, and that has come down from more than six at one point. in order to buy 10 year treasuries and stay fully invested in the fixed income

market, you have to believe that one and done this year and one for next year, so i get concerned about having exposure to treasury rates, even in the global environment, political environment, we are in. the next surprise on the radar screen as the fed walking back this pricing they have done. jonathan: it is the rapid fire round. one word answers. really quick. long bunds or gilts. -- jonathan: buy high yield europe or cocos? -- >> i was going to say neither, but high yields. jonathan: you have to go

somewhere. who hikes first, the ecb or the boe? >> ecb. >> ecb. >> ecb. jonathan: there we go. final question. who last longer, may or yellen? >> yellen. >> yellen. >> yellen. too easy. jonathan: i just love how much trouble you will get in. you have been watching "bloomberg real yield." ♪

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