♪ jonathan: i am jonathan ferro. it's a 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, another political shot in the u.k. prime minister may's conservative party loses this majority. the ecb is going nowhere fast. president draghi paints a picture of a better economy. and contingent convertibles are put to the test into spain. a european bank fails. we start with the big issue,

another political surprise in the u.k. >> it is very, very surprising. >> the old rules don't apply anymore. >> i have to refresh my screen. >> there are a few bleary eyes eyesere are a few blurry in london today, and maybe a few surprised faces. i think with the business community wants to see is the economy at the top of the agenda. >> it was always obvious that this unnecessary, reckless austerity was going to have an impact, and that is what it seems to have done. we will see going forward. -- it hasing is it is weakened her hand in these brexit negotiations. >> the conservative party has a right under the constitution. she has no legitimacy at all. >> she is, effectively, a lame duck.

this will make it difficult to bargain hard. jonathan: let's bring in our roundtable. around the table with me in london are our guests. we have a guest joining us from california. guys, great to have you with us on the program. we begin with the e.u. go function on the bloomberg. refresh the bloomberg just to see if it was real. it was real and not what people expected. they were not expecting to see those numbers for the conservative party. the story now, luke, and i'm interested in your thoughts, the -- here in london, the conversation shifted to whether or not you get a softer brexit. there seems to be optimism around that.

justified? >> i don't think so. i am cautious. there is a risk we end up with just as tough a brexit. there is a good chance, there is a clip saying it will make it harder for her to negotiate. she gets backed into a corner, so her default will be for a harder brexit. she has a tougher cardroom of mps. they are making a bigger noise in a party than they were before. jonathan: the fallout in the market was very, very localized in the united kingdom. outside of it can hardly any spillover. how did you view the results? how does it inform your view right now? >> yeah, that is interesting. it was a result that nobody expected, right? the challenge for the market is going to be, now the u.k. has to figure out how they are going to negotiate free-trade with the rest of europe. immigration, payments within the european system. when you put that together, the negotiations starting next week, and the government does not have

a majority has to now form a coalition government. it is going to be tougher to negotiate their way out of brexit. uncertainty is not good for the markets. you have seen that by the reaction from the pound. jonathan: scott, this is taking place almost exclusively through sterling. ago,told you a month parliament, -- hung parliament what would you have said? , >> i think the issue has to do with what is she going to give away in the medium-term in terms of fiscal spending or something to appease the voters and regain her legitimacy issue. i think the issue here is that this is a very messy situation. four-door -- we need a four -- we need four different scenarios. we are stuck in this midpoint, which is in some respects the hardest for the market to digest. i think part of the reason the pound did not go down more is

this issue around the saw/hard brexit -- soft/hard brexit. it is messy. jonathan: what do you make of the resilience in the gilt markets day? >> i pretty much agree with all of that. the issue is maybe a shift to more fiscal spending, loosening the austerity strings little bit. , but i think the market is doing almost what you would expect. we have been through a lot of political noise the last two years. you know what? it is harder and harder to move the market on a tough, political outcome these days. we will wait until we see the weekend and monday, and then possibly we will get a reaction. jonathan: the guild curve has shifted lower over the last month or so. the gilt market, the proportionate of it is held by foreign investors. repatriation the story to evolve over the coming months? >> the challenge here, jonathan, is the central bank has to do more of the heavy lifting

because the fiscal side of things, there is a lot of uncertainty. the reaction of the market is not unusual. the first thing that goes is the currency. the currency is getting weaker. one could argue that in 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, and on the other side, uncertainty and lack of growth. so what you have is lower gilt yields, and uncertainty on on repatriation, immigration, trade. i do not see gilts selling off any time soon. i don't think inflation is going to be a problem. i think it makes everybody's job more difficult, and the reaction to the currency is right on. jonathan: there is a conversation over the coming quarters over the bank of england -- are they going to be uttering the word stagflation? >> it is interesting. i am not sure you will get stagflation. inflation itself is now slowly rising to a central banks are

wanting to be. but 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: luke, genius move, isn't it? have a referendum, make sure it is a mess come and hold an election as well. [laughter] >> look, we will see how consumers and other surveys respond all of this as well. 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? but i am always on optimistic side. it will give us something to talk about. jonathan: a big week. everyone is going to stick with us. coming up on this program,

santander steps in, raising questions for the $181 billion coco bond 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." -- whenble bonds european regulators decided banco popular of spain, debt was wiped out, senior bondholders were protected, and authorities taxpayersrun, saving from pain costs. it was a textbook success for

the regulator, and captured by the chart, but what about the investor? back with us are our guests. scott, a success for the regulator, i see that. is there a warning for the investor though that thought they could go into -- that thought they could 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. at the same time, the speed in which the regulator steps in and 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 big question mark as to whether or not this was a test of the cocos. the idea is you suspend coupon

payments before the bank fails to keep the bank functioning. in your mind, what was it this week? what was the take away from the first real workout for the securities? because scott is right when you think about what risk you are taking, and a lower rate environment, you're getting paid a higher interest rate. these are contingent convertibles, which means they convert into equity as a bondholder at exactly the wrong time. , when thehe bank institution 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 these debts, and the pace and few which it likened -- what i read it $2.2 billion worth of cocos have lost their value, i think people need to be aware of of what they are getting into. jonathan: luke, what was

remarkable is that the cocos were pretty resilient. 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? they're mostly retail. is that much of a success? >> well, that is the point. how do you test the wider market? they were held in a restricted number of accounts. these are not the mom and pop accounts. these are the ones that have been really heavily sold into asia. that is a very different set of circumstances. i would like to think that perhaps you would be right that they would trigger through the coupon, you would see it coming as a capital ratios fell. banco popular is very different. it was a very convenient one to get sorted out quickly. like an old bank of england sorting it out under the carpet. suddenly, we knew about it. jonathan: where else do you go?

if you look at single b's and compare it to her cocos are in terms of yield, you are almost pushed up there, pushed down the capital structure. isn't that the real take away here? setting your, there are not many places to go? >> no, you are right. negative yields in germany, like you said, for mom and dad investors to get any kind of income, they have to take more risks. and the question is how much , risk are they taking to get that additional income? what investors have to remember is these are bond-like instruments that trade more like equity, and equity markets will be quite volatile. so in a way, you are doubling up your investments if you want equities as well as cocos. and when there is a run on the bank, you get put in at the wrong time. the only advice you can think about is be careful and

understand what you are investing in before you go in for that coupon that is higher than the cash rate. jonathan: scott, we can paint a bearish picture for europe quite easily given how tight spreads are. what is the bullish case? >> it is the punch from the ecb. it is the punch bowl full and not drained out anytime soon. and so, you know, this investor behavior that is consistent with buying higher-yielding securities is consistent with government bonds to buy higher assets. and that is being promoted by the ec be -- the ecb as we saw this week. it does not surprise me that we don't see contagion, because everything else was so effectively locked down by monetary policy. but we should be looking at the market as it evolves through time. there have been signs and other spanish bond markets that it has been weak. and italy is the big story there, but it is monetary policy

at the ecb that is pedal down. jonathan: at the same time scott the ecb can't buy bank debt and , i would imagine they would be better if the ecb stepped away. so, is there some insulation away from the ecb? >> i mean, look at the european bond market in general. the spread is 110 basis points, but theyield is 85, bonds underlying it are negative. hedged respects, a yield corporate bond market does not say much such a bad idea in the context of what we're talking about in terms of the european market. but obviously, it is encouraging investors. the ecb is not buying high-yield emerging markets. the vester say it is encouraging -- they investors it is encouraging are. jonathan: we also saw it in the book for the italian 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? >> i am not really sure why you are getting really aggressive 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 a 40 basis points negative depot rate in europe. just holding cash. people are taking it, taking it, taking it. you hedge over rates and get a bit of a spread there as well. what they need to do is change their mandates. come see us. [laughter] jonathan: if i offered you a 30 year in italy with a 3.5% coupon, is that something you would be interested in? give me a thesis on the

peripheral that in europe right now. >> not really, unless i was an insurance company and i needed , coupon income to hedge my liabilities. that is one way to own the 30-year-old -- the 30 year. the european economy is starting to improve, and ecb at some point we'll have to start to normalize rates. i'm not saying today or tomorrow, but you are locking in your money for 30 years with some credit risks. the only reason that would work is you have some big, geopolitical issue, are massive correction in equities markets that people want that duration, but that is a hard call if that will happen. me, myself -- i would not be buying 30-your bonds. jonathan: where in europe in the fixed income space, and you can go anywhere by all means, are you constructed anywhere? would you get long anything? [laughter] >> 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 and is a capital price above par. so you are guaranteed to lose money if you hold to maturity unless you go down the credit curve and pick up investment grade corporates. they are not very high in yield. so, it is very difficult in europe to find value unless you go down the credit curve, but the risk is the further down you go, the harder it is. we find more value in asia and australia and parts of the u.s. jonathan: guys we will get to , the u.s. shortly. you are all going to stick with me. we are going to get on the check on the market. yields grinding higher on 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, -- the week ahead -- a rate

decision, including the fed. you are watching "bloomberg real yield." ♪

♪ from the city of london, i am jonathan ferro. this is "bloomberg real yield." a big week ahead. it is time for the final spread. coming up over the next seven days, outside of elementary elections, a wave of central bank decisions. a hung parliament, prime minister may holding on to complement -- holding on to power confirming right now that chancellor hammond will remain the chancellor in her new cabinet. we also have a swiss central bank decision and the bank of japan as well. a look ahead to break it down, let's begin with you. we look ahead to the fed and get

some thoughts on that. 10 year yields have printed lower in the last couple of weeks, 2.14%. is there a message in the curve for the federal reserve? >> jonathan, interesting the last month or so. bond markets have been rallying. 10 year treasuries work trading to $2.60 when trump was elected. now it is equity markets have $2.10. 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. the market is pricing at a 95% chance they will go 25 basis points next week. i don't think it is unusual for them to go, but i think it is one and done for this year. jonathan: i have heard a lot of

people said at the treasury market is one of the most mispriced markets on the planet. is there anything to like about treasuries right now? mispricedt is a most -- fixed income is the most mispriced because of the intermission of the central banks. they have been printing money and buying debt. look 10 year treasuries, you , should trade the range. i think i would be longer 10 year treasuries than shorter because i think the equity markets are being too euphoric of what delivery you will get from the trump administration. i think if there is a disappointment, there is a correction and equities. jonathan: scott how much is left , to discount from d.c. and the treasury market? >> if you look at the amount of fed rate hikes that have been price in for the rest of this year and next year, it is basically three, if you are optimistic about the total sum. that has come down from more than six at one point. in a to buy tenure treasuries and tuesday 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 a little concerned about having exposure to treasury rates, even in the kind of global environment that we are in political environment, we , are in. because the next surprise is that the fed walks the market back for the pricing may have done. that is a significant risk and that is next week. jonathan: here is -- here is a surprise for you for the here and now. it is the rapid fire round. one word answers. for questions, really quick. long bunds or long gilts. jonathan: high yield or cocoas. >> bonds. >> bonds. >> cocoas. >> high-yield. jonathan: who hikes first, the

ecb or the boe? >> ecb. >> ecb. >> ecb. jonathan: there we go. final question. maylast longer -- minister or chair yellen? >> yellen. >> yellen. >> yellen. too easy. jonathan: i just love how much trouble you will get in. [laughter] jonathan: you have been watching "bloomberg real yield." ♪

♪ >> coming up on "bloomberg best," the stories that shaped the week into business around the world. written goes to the polls -- britain goes to the polls again. a diplomatic rift disrupts the arab world. the ecb says no more rate cuts are coming and high drama on capitol hill. >> i don't think it is for me to say if whether the president obstructed. >> this is reality tv. this is not a serious investigation yet. >> apple hopes its new home pod will be another home run. >> tim cook shares insight into the company's strategy. >> music is deep in our dna and