jonathan: i am jonathan ferro. 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ coming up, janet yellen hikes interest rates once again as data in the u.s. starts to soften. it is another rough week for treasury bear 10-year yields , dropped a new low. jeff good lack says literally raise cash today. we start with a big issue, hawkish fed chair janet yellen.

>> this statement forecast is more on the hawkish side. >> they are trying to nudge the market in a direction that is more favorable to the fed. >> they are determined to be steady as you go until the evidence is overwhelming and the other way. really datad were dependent, they should've looked this morning and said this is really dovish. >> we can talk as much as we want about the taylor rule and phillips curve and all that, but this has proved that all of those are things of the past. >> we should be seeing the gradual upgrade in inflation that we saw for a while and then stopped, which i think she did too. ofi think of yellen and -- being pilots in a plane that are trying to soft land the plane. but the instruments are not giving them proper readings. that is a really hard to do, and they don't have enough

visibility to the runway. jonathan: joining me today from blackrock's rick rieder, alongside him jeffrey rosenberg, and pablo goldberg. gents thank you for having me in , your house. >> thank you for having us. jonathan: let's begin with the federal reserve. hawkish bias from the chairman. rick: i think it definitely was hawkish tilt do it. quite frkli think it was the , best press conference from chair yellen. she was directed, committed, unwavering and quite frankly there were , questions that were distracting. she laid out the plan. this is our plan and we're sticking to it. quite frankly, some of the short-term data, she rightfully ignored. she thought about the bigger picture. she is focused much more today on financial conditions. and those have gotten easier. she was committed to this is where we are going. jonathan: last year we talked about a fed that did not stick

to their forecasts, they had a credibility problem. now, we are talking about a fed that ignores the data and making a policy mistake. are they stuck between a rock and a hard place? jeffrey: i want to walk back what you said. it is not clear they are making a policy mistake. they are sticking to a forecast dependency. they moved off of data dependency. there are good reasons for that. they cite the inflation data being temporary. that may be an error, but now it is not clear that it is at all. i think it makes a lot of sense and is important that we understand the disconnect. the market is still data dependent, but the fed has moved to forecast dependency. that is a big part of the discussion. jonathan: that have to be a credibility problem, one minute your data dependent and now you're not. pablo: broadly they are data dependent, but that is not week to week. data dependency has to be over what is the cycle we are operating. by the way data dependency also

, has to reflect where we are in terms of market conditions, where we are with financial conditions. i think they are data dependent. i would argue the two years prior they were much less data dependent. i think they are being vy sensite to where we are. jonathan: tell me about where you and the team of a blackrock is doing relative to what is the price in the market. pablo: a couple of things are happening. i feel like there's this great misconception. i don't know if you have these charts. we have to be at 2%. their mandate is not 2%, it is price stability. there are things weighing on inflation today. technology is pressing down. talking about m&a today in terms of what amazon did, taking some of the inefficiencies out of the system, there are dynamics happening today when you think about this inflation report, places like we show here, there are extraordinary things happening with services. the inflation around services has been stable. by the way, the only reason we are trending down a bit is

wireless because of cuts. inflation pressing down on inflation. if you look at goods inflation, technology is pressing down. the central bank cannot lift, and it is good for the consumer, it is good for net disposable income. so the point about, too the , pressure you have seen on wireless, these are all good things for disposable, whether it is apparel. whether it is food like today, all of these things -- the fed shouldn't be targeting. we have to hit 2%, if technology is helping the consumer and lower income by pressing down on inflation. pablo: we need to think about a fed that is dealing with two important different forces. first you have the shortened inflation shocks and the fed is looking at long-term inflation implications. the second one is how they are going to articulate between the structural move and the more cyclical move. aere they say thathere is high bar to change the policy of

unwinding the balance sheet as they are going to be doing, but on the other hand they still have the ability to hike or not hike, or even cut. how they do this is going to be the challenge going forward. jonathan: the market is going somewhere else, breakevens rolling over, five years have been rolling over for quite a while. the 10-year treasury yield is lower than when they started hiking at the back end of 2015. i find those two things hard to reconcile. do you? >> yes, but to take today's movement in terms of the yield curve, and i had another chart we were going to allow as well on this. that may not be the chart. but we have an unwind going on around expectations on fiscal policy that were part of the yield curve steepening, part of the increase in to near he -- 10 year rates that is unwinding as well. you have a inflation potential

between how much of this is inflation and inflation expectations, clearly this happening in the same week. a lot of the trends to lower rates were proceeding that. that is unwinding some of the expectations for much bigger impact on fiscal policy. and really pricing that out of the market. jonathan: rick, something that people find odd, myself included the fed is not forecasting , rates, medium forecasts at 2.1%. 10-year treasuries are just north of 2.1%. so, either someone is wrong or we are going to have a very flat yield curve. which is it? rick: the fed can influence the front of the curve directly. if they are not doing qe or particularly if they are reducing it, they cannot control the back end of the curve. i would argue the ecb and bank of japan are as much influencing the long end of the yield curve. it is the demand that comes in from overseas, because our assets are reasonable. so we think you can create a

dynamic where the fed can move the front-end up, and it is really hard to move the back end higher until the ecb or the bank of japan does something. there is something really critical. there were questions about whether they were moving bank of canada. the world is moving very glacially towards normalizing policy, but until you get other central banks moving, our 10-year rates will stay low. that is part of why the dynamic is taking place today. jonathan: will we continue to see a curve that stays flat? jeff: possibly. i want to go back to what rick was just saying. there is a lot of focus on the fed and u.s. cpi disappointment. but the points at rick were just making is it is a global market environment. it is not just the u.s. yield curve that is flattening. global yield curves are flattening. that impact is because while we are very interested in the shift in the language and the future balance sheet runoff, the rest

of the world is still far behind. the pace of that change will be glacial. we can anticipate that at some point this should be about bringing term premium back into the market. now, we have the chart up and you can see the term premium. for now the term premium is under incredible pressure because of the combination of negative interest rates and ongoing, aggressive qe in the ecb and boj. and the fed, which is going to be less and start to on wind it. are still in an environment where the effect of that is a huge dampening on the term premium. jonathan: can you get -- a treasury market that decouples from a global market? >> no. we live in a global world. we live in this demographic where the rest of the world is aging faster. the markets themselves everybody , in the marketplace are going to the place where you get the best risk-adjusted yield. in terms of risk free rate is the u.s. there is no way we can get away

from this. >> we need to reconcile two more things, the dollar, what happens if we get a flat yield curve? if the fed continues to tighten, what will happen with the dollar? in europe they will be removing , accommodation in the long and, but not anything on the front-end. the second is that we used to use as the slope of the yield curve in the u.s. and make an assumption about the state of the economy. flat, to invert the yield curve are a sign of recession. how will the fed, and will the market reacted to that as well? jeff? jeff this is a : really important point that the interpretation of yield curves is a textbook interpretation as pablo just talked about. you have to throw the textbook out when it is about negative interest rates, zero interest rate policy and massive qe so , that as you get further into the expansion and get further along when you might have expected flatter curves, we see steeper curves, because it is

really about the impact of global withdrawal of policy. jonathan: i wonder if something else is going on? keep looking at the yield curve. a lot of people have approached the situation as something is wrong. either the market is wrong or the federal reserve is wrong. you just touched on it. if the two-year reprice is based on what the fed is doing, is the market determining the fed is going to quickly too soon and taking away inflation and growth from the future, and therefore the back end is well supported because of that not because of the ecb? is there an argument there? >> somewhat. there i think there is this debate going on about is the equity market right, the rates market right? both markets are right. there is extraordinary demand for income in the world. like not think anybody in this generation has seen before. what ends up happening, that pull for i have to get yield, it doesn't go away. people talk about there must be a pernicious view of what growth

would be. you think a decade ago with oil gyrating extraordinarily, from $40 to $150 in back. we are going from $40 to $55 now. more stability of inflation than we have had historically. you can be comfortable holding interest rate for much longer. arethan: gents, you sticking with us to the next 20 minutes aired coming up on this program, over the next 10 minutes, a little nervousness in the market. all of these gentlemen weighing in on the forecast for volatility. from new york, this is "bloomberg real yield." ♪

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jonathan: this is "bloomberg real yield." from blackrock's trading floor in new york city, jeffrey going my making more headlines this week. the manager of the $2 million double line, today's volatility markets are probably numbered -- trader a traitor or speculator, you should be raising cash today. bill gross recently said that u.s. markets are at the highest risk level since before the 2008 financial crisis. with us to discuss from blackrock, rick rieder, jeffrey rosenberg, and pablo goldberg. talking about the return of volatility. equity, fixed income, the lot, does that make a risky environment? >> i am getting in the habit of disagreeing with your premises. jonathan: you can do that. that is the whole i throw a point. premise. >> your premise is everything is rich.

we don't see everything is rich. we are on the fixed income side. on the fixed income side it is not so much about rich or cheap. it is about are you paid for the risk? the issue in next income relative to equities is you have asymmetric downside risk. don't get the upside and you get a lot more downside risk. on equities, valuations change. we think equity valuations are better in some areas outside of the u.s. the key differential is you have upside as similar to the amounts of downside you are taking. in fixed income, you don't get that. and that is part of what you're hearing and terms of the caution. we share some of the views recognizing that spreads are at high levels, and the risk is more asymmetric. jonathan: do you think european credit is rich? >> european credit is absolutely rich. it is highly affected by central bank behavior. you have negative interest rates forcing people into underwriting levels that are not economic

, because you have a non-economic driving force. jonathan: there will be a lot of people watching this program that agree with the premis and wondering what jeff rosenberg thinks is cheap. jeff equity markets are less : expensive than fixed income markets. there are areas of the equity markets that are more attractive. the key issue is we are valuing equities against an environment where you are not going back to a 5% or 6% interest rate or environment. if you are persistently low interest rate environment, the whole of valuation paradigm has to be rethought. jonathan: pablo, em, it is like the buy europe trade. either one or two things happen, someone says i want to buy europe, or someone says i really like e.m. right now. is that becoming somewhat crowded? pablo: we are seeing significant amounts of flows into the asset class. they are mostly driven by flows

and this drop in volatility worldwide. back to the area of the relations if you value em today , with the vix where it is, em is not that expensive. now, if you think that there is a repricing involved light has been said in earlier comments the story changes a little bit. ofe significant amount comment coming into emerging markets, rick here loves emerging market rates, that is one of the portions of the asset classes that is better price, not that expensive. currencies appeared to be a little bit on the -- side yard jonathan: rick? rick: as pablo said, is volatility too low in the world? the volatility is ridiculously low. that is what the fed is pushing back on. that is abnormal. this does not necessarily mean things have to go down. i think that is a hugely important what drives financial point. assets?

distort real rates down. central banks of real rates down and then you inflate some assets. your point is about going to emerging markets or europe. emerging markets are away from the distortions. the ecb is not by mexico, so you trade closer to equilibrium. if they run out of assets -- what ends up happening, do you buy places like emerging markets where you can get easier policy while developed markets are raising rates. part of going into europe, i don't think a lot of people say you have to get european rates but equitiesero, where the discount rate stays low and growth can be good, they will drive the equity market up in europe. it depends where you look there . is still value in fixed income. volatility going up. we like a buying a lot of front and assets, a lot of securitized assets, create balance in your portfolio so that you don't have to much beta attached. jonathan: em has been one

directional trade for a lot of people. the weaker dollar supported that. does that change in the back half of this year? pablo: i think it does. we will see way more dispersion in the second part of the year. we were expecting some of the campaign promises in the campaign of the u.s. election to generate dispersion in emerging markets. we ended up having nothing of that. i think the second half of the year will be more out the -- alpha driven, relative value than the first act. jonathan: always causing trouble. honestly. we will talk during the commercial break. rick rieder with us. let's look at our markets have been. yields are lower across the curve and 215 and 10 year here and now. we did just a year to date low earlier in the week. still ahead is the final spread. u.s. housing data to dump about.

-- to talk about. this is "bloomberg real yield." ♪

♪ i am a jonathan ferro. this is "bloomberg real yield." on's get you up to speed what is happening in the next week. brexit talks data on u.s. commence and we get some housing. with me to wrap it up is rick, jeff, and pablo. let's wrap it up with your -- a look at europe, shall we. things look better. i wonder what that means for the bond market. the only thing that matters is the ecb and what they decide to do. >> growth is better. we think growth will be better. you are seeing consumption and employment pickup. we thank you have a runway where

europe is better. core inflation is not picking up fast enough for the ecb. so, you've got a dynamic where growth is good and a central bank is going to be accommodative for a longer or meadow of time. jonathan: is this a recipe for a steeper curve? ecb, not in a rush to go anywhere -- isn't that a recipe for steeper curve? it could potentially behen the markets have the potentially price that i the problem is again, pressure downward on interest rates and persistent pushing out of expectations when the balance may turn. over the longer run, when we're talking about balance sheet normalization first in the u.s. and eventually in europe, further behind in the bank of japan, that is your recipe for a steeper yield curve. but it is a glacial pace.

rick: they will taper down and probably start announcing it somewhere closer to september. then you start reducing, tapering again in the beginning of the year and then wait and do the deposit rate after that. it is going to be super slow. people don't really appreciate even if you taper down, $60 billion a month out of the market is huge. maybe you move at $40 billion a month in the beginning of the year, depending on where that core inflation number get to. jonathan: is it the ecb moving? rick: >> for a number of reasons, the fed has edible window to move. absolutely. if you said to me, there is a lot of talk about issuing long debt the u.s. what is more important today is where these other central banks go. jonathan: to wrap it up and answer some short, sharp questions.

behind the curve, or too far ahead? for the federal reserve. >> behind the curve. jonathan: behind the curve european high-yield or u.s. , high-yield? rick: u.s. high-yield. jonathan: long europe or south africa? tableau long brazil. : jonathan: yes or no? rick no. : jonathan: short or long? jeff short. : jonathan: chair yellen to hike three times next year? yes or no, rick rieder? rick: i would say -- i would say yes. that is the general direction of travel. jonathan: rick rieder and the guys at black rock, this is "bloomberg real ♪

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