nathan: from new york city for our viewers worldwide, i am jonathan ferro. this is "bloomberg real yield." ♪ coming up, crude enters the bear market, weighing on inflation expectations, reflecting balance sheets of energy companies. and the treasury curve is the flattest since 2007. credit investors put their foot down after companies get greedy, looking for even lower yields. we start with a big issue -- inflation expectations continue to break down, waiting on the yield curve. high in theen

developed world, but frankly i think it is just moving up because of the fed. >> it is the lack of faith. something we have been seeing for seven years, the light of faith in the administration, the lack of faith in the qe in other parts of the world that are tapering. >> the expectation that nothing is going to change and it is the business as usual, i think that is an incorrect interpretation. we will see curves steeply again as the right policy makes begins to unfold. >> if you look at the feds, they have been around the block a mother have seen inflation pick up when no one expected it to, and they are responding in a way that their life experience dictates. that is waved in front of the market everyday is oil rises. have been going in one direction for a while now, and that is having a big impact, at least on

the bond market. jonathan: greg davis, global head of fixed income at the vanguard group, kathy jones, chief fixed income strategist, and from california, i am pleased to say that michael buchanan joins us as well. guys, great to have you on the program. the treasury curve, one that is 2007, 138st since basis points right here, right now. greg, when you look at that chart, what is the signal, if any, that it is going to be right now? gregory: it is clear that the market is pricing in. the fed has been quite active. we've seen rate hikes over the course of the last year or so, and that is causing the curve to flatten a bit. ultimately, we have nothing much in terms of inflation. that is getting investors an

avenue to stay invested. jonathan: kathy talk about the yield curve flattening and maybe at some point down the road conversing. is it different? kathy: i don't think the fed is going to go so far that they will push it to inversion but i do think that the market might be underestimating how much the fed where it ahead, and will pick up down the road. jonathan: michael, this flat yield story, given the central bank stimulus elsewhere, this is not your 2007 story. what do you think, mike? michael: i think a little bit of it is simply relative value. if you look around me globe, you will see that rates are almost everywhere.

it is a most natural to think that relative value might actually bring investors to migrate into the u.s. market. as a get a tightening market, it is not entirely shocking that you get that. i think there is an in band amid -- an abandonment of the inflation swing or trade, and the pendulum can swing both directions. we saw it with the euphoria initially with a lot of the trump initiatives. i think it will swing the other way. jonathan: kathy, the data is moving against him, the commodity moves against them, and the markets as well. kathy: absolutely. we have gone from the reflation trade to the almost deflation trade. when you think about what the fed is looking at, the financial conditions are extremely easy right now. one of the reasons they want to raise rates is just to get back to normal. they want to avoid asset price

levels, they want to get ahead of this. there is nothing standing in their way to raising rates. we still have negative short-term yield right now. for the fed point of view, they have plenty of one -- runway for short-term rates. gregory: they will start on the whole balance sheet normalization process. it has been well communicated, and the market is taking it in stride, but the reality, we need to see when we will start implementing it, whether there is any adverse reaction at that point in time. that does give them reason to be a bit cautious. jonathan: jonathan: you see at policy air on the horizon? gregory: it is hard to see if it is on the horizon, but they haven't you for numerous month -- they have been saying for numerous months it is coming. i think we'll be fine, but if they get too far ahead, you run into potentially having a policy mistake. jonathan: they say they will be

german by the data, but we are still trying to figure out what data. michael buchanan, something that has come up on the program before, and i will bring it up again, it is not the 2.1%. we have a 10-year right now just at 2.1%. either someone is wrong or you send someone up the flat yield curve. where do you stand on that debate right now? interesting.s i think you do have a big disconnect right now between what the fed is implying versus what is implied in the market. the question is -- who is ultimately going to be right? our view is that the market is probably more right here. over time, you will see the fed dots come down. they will imply certainly less tightening van they are playing right now. that is where we are going. we think the economy has some real challenges in front of it, and we think the data will valuate that. jonathan: is it a case of the

market being right or the fed being right or when being wrong? maybe what people anticipated coming into the year when the fed was going to hike, you get a steeper curve, that is just not what is going to happen here are the gregory: kathy made the point earlier that there are a lot of expectations in terms of what was going to happen in d.c. in terms of regulatory, tax reform, and the impact of those policies was expected to start potentially impacting the market this year, and we have seen it be delayed. it is not surprising that we see this reflationary bias in the market being back out again. jonathan: let's talk about actionable trades. everyone said, "stay away from duration." gregory: for us, we have been neutral on duration in general. it is hard to have a longer conviction in our active portfolios. we did see some cheapening of 10-year treasuries, we will be buying, adding duration to the

front specifically because the long-term head rates will exist -- headwinds will exist area kathy: we have a similar -- will exist. kathy: we have a similar stance. between three years and seven years. if we were to get it back up at rates at 2.5, which is where we see the 10-year yield them a we would probably lengthen somewhat. jonathan: we have seen the highs on a 10-year. gregory: i believe so. jonathan: we are done and dusted. greg davis sticking with us, kathy jones, alongside mike buchanan from western asset management. that wraps up the question on treasuries. coming up, investors push back and ask for higher yields. we will get into that in just a moment. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block where the search for real yield comes to argentina. 75 of those sold, manages to convince investors maybe it is not such a concern. $2.75 billion in century euro, .88%. the recovery ratio was the highest since the -- october 2011. investors, here is a story for you, put their foot down.

virgin media, shaw communications, all pulled debt deals this week. yields.for lower back at our roundtable, greg davis from vanguard group, kathy jones from schwab center financial, and gregory davis -- michael buchanan from western asset management, is this a good thing that is being pushed back a little bit? michael: i think it is a great thing. what it really shows is discipline in the market. obviously we have had a little wobble in the credit market, and investors, rightfully, want a little more yield, they want a little more negotiations those broke down. the key thing, these companies come if they wanted to, if they opted to take advantage of the deal, they could have gotten a deal printed this week. for the most part, what they did, they just did not like the evaluation.

i think the market is the, and for me, that is the big takeaway here. jonathan: greg davis, about companies coming to market because they do not actually need to come to market because they do not need the money, what does that say? gregory: it has really been around financial engineering doing increasing dividends, stock buybacks, things of that nature versus actually using the capital to invest in businesses and push growth that way. it has been more or less about financial engineering of the balance sheet. jonathan: sometimes i turn on the tv, and i will not say which channel, but you hear so much about credit. high yields have done so well in 2017. ccc has been the l performer in 2017. why is high-yield getting such a negative rap still? gregory: what you and up seeing is people get concerned about high yields. we saw that last year where there was pressure in the energy space. we have not really seen that

yet. the high-yield indexes up on was 5% this year, which is a really strong number when you think about the backdrop that we are in jonathan: and the supply story -- that we are in. jonathan: and the supply story, kathy. kathy: yes, mostly in the investment space where issuance has been strong. the spreads are so narrow, we are at post crisis lows -- very close to it. that financial conditions likely to tighten, that is not good for high-yields , so i would make it is right that investors are demanding more yield. jonathan: greg, suppose that conditions may or may not tighten. they have been hiking, but financial conditions have gotten easier. why should that change? gregory:>? it'll be a function of whether the market is more aggressivethan what is being priced income and

what is the action, and what is the equity market? at the end of the day, rates are relatively low in the u.s. and overseas. it has been very supportive for the equity market. jonathan: michael, this time a couple of years ago, we had market, the bear talking about blood on the trading floor and absolute carnage. it is different this time. why? michael: it is different for a few reasons. one is we saw what happened in 2015 and early 2016 -- production came off-line, companies learned how to survive or else they did not survive, and quite prickly, a lot of these companies ended up defaulting. it is interesting when you think about energy with an high-yield. what you did is defaulted i would think the most vulnerable cohort within energy, you defaulted that out of the market, and you are left with the stronger cohort. that stronger cohort now has more disciplined, more balance sheet strength, and what they have done is, like i said, they

learned how to adjust their cost structure. i do not think this is going to be a repeat of what we saw in 2015 and 2016. in fact, we are looking at this as an opportunity. from 6%preads have gone now back to 7.5%. i think there are really high quality that you can buy and make decent returns on. jonathan: is that sector-specific, mike? michael: it is credit-specific. you cannot go out and randomly by energy. if you are looking at exploration and production companies, whether cost structure is, what their leverage is -- there are a lot of considerations. that is how we are taking advantage of it. we are picking through the entire sector and looking for those companies that we know have the management and the financial wherewithal to ride o a prolonged- out period.

kathy: one ofkathy: the concerns about the high-yield index is energy, and if you are sort of passively investing in energy and high-yield right now, or high-yield, you have a lot of energy exposure and not taking the approach that mike is taking and being jonathan: very disciplined. jonathan: greg, weigh in on the active-passive debate. how do you navigate that story at vanguard? gregory: we see most investors being broadly diversified when it comes to index process, but we offer both, active as well as an active, but the main story for us is around low-cost, being able to do it that when we are in a lower yielding environment, you do not want to give away too much. that is really important in this type of environment. kathy: i would agree with that 100 percent. bringing cost down is one thing you can control in a low-yield world, but in this case, projecting energy might be a problem, you might want to switch to active for that

segment. jonathan: looking at high yield, we had a chart of default rates on the screen a little bit earlier. i would find it interesting when people bring up default rates and justify the long position because default rates are ok until they are not ok, and then that is a problem. that is a tough justification for me. gregory: it absolutely is. it is not where default rates have been, it is where they are going. i think it is tough to call. as long as you have a strong economy, you do not have too much of a disruption in terms of fundamentals, the pricing of oil, and things of that nature. i think you can hover along with relatively low default rates. to the point kathy was making earlier, when you're in an environment where the fed wants to tighten conditions, you have to worry were at some point they may go too far, and that may have a negative impact on the higher beta sectors. kathy: and that is dependent upon their access to credit. the default is up when they cannot get access to credit anymore. some of these companies are vulnerable, and there bank loan start to get called -- that is

when you run into the fall issues. of the areas of the markets where people get nervous because spreads a very tight. when you get a breakup, 10 basis points, people get very nervous and start thinking about running to the hills. what do you use as some type of indicator? michael: all we are doing a strike to look at those metrics that ultimately will influence or lead to default rate. we're looking to cash flow generation. we are looking at overall health of the balance sheet. this robust overwriting environment that we have gone through has allowed a lot of the high-yield to effectively term out there death. the refinancing risk that faces a lot of these challenged companies have been a libya did because they have been able to access the market, they have been able to push out maturities, or place higher coupon date with lower coupon

debt. in general, we are looking for those signals, those funny little factors that overtime will lead to fundamental trends. jonathan: what do you look forward to, greg? are primarily investment-grade working with a fixed income management team. we are ultimately looking at the overall strength of the economy and what we see in terms of fundamental growth there. get, when you company-specific information, it is about earnings, balance sheet management, and others to make sure we're not the deterioration. kathy: same thing. the typical metric when we do credit research, free cash flow, and earnings, and then the debt ratios and asset to credit. kathy: greg davis from vanguard group, kathy jones from schwab center financial resource, and michael buchanan. coming up, we will have a market check. yields lower on the longer and. -- end. it is a flatter yield curve

story, down five basis points, up three on two-year yields. next up, it is the week ahead, and it features the bank of england's governor carney and the ecb's mario draghi as president trump will also mention a couple of leaders over in d.c. you are watching "bloomberg real yield." ♪

from new york city, i am jonathan ferro. this is "bloomberg real yield." it is signed up for the final spread, the week ahead. president donald trump will be -- to see if the fed will clear away for some of the biggest banks in the u.s. we will also get the financial stability report as well and hear from governor mark carney. from western asset

management, greg davis, a year since brexit, and it is a big story for global bond markets, and now it is not. why isn't it anymore? gregory: because i think people have realized it will take longer to figure this out then people initially expected to use all significant market reaction right away, but it is in the details. jonathan: kathy, who would have thought a year later now we would be talking about potentially a rate hike. why are we talking about a rate hike? kathy: the currency market is feeling the impact of brexit. it is way down first of the dollar and versus the euro, and that is what is driving inflation right now. much of what people in the u k, as you know, consume is imported. jonathan: we talked a lot about the central bank forward guidance in how wrong they can often get things. i remember when the bank of

england was talking about interest rates when the federal reserve was doing the same thing with unemployment at 6.5%. it feels like it is very much a moving target and quite a significant way. gregory: it definitely feel that way, and we have seen that in europe and other countries as well. you see evidence that there is an inflation pressure building up, but we really have not seen it so far. jonathan: do you think they continue to have it in the's -- to lose faith? gregory: i think you start to. jonathan: guys, we have to wrap things up with the rapid fire round. quick questions, and if you keep your answers to a couple of words if you can. yield curve flatter or steeper? gregory: steeper. per.y: slightly stee michael: i will safe slightly flatter. gregory: pick up the pieces. kathy: pick up the pieces,

reluctantly. michael: you definitely pick up the pieces. jonathan: what comes first -- yellen supporter or another rate hike? -- yellen's departure or another rate hike. gregory: rate hike. kathy: rate hike. michael: rate hike. jonathan: prime minister may's department or rate hike? gregory: departure. kathy: rate hike. michael: i will go with prime minister may's departure. jonathan: there we go. from new york, you have been watching "bloomberg real yield." ♪ .

p.m. in london. i am vonnie quinn, welcome to "bloomberg markets." ♪

vonnie: from bloomberg world headquarters, the top stories we are following. the health care bill hold out. we look at the task ahead for senate majority leader mitch support for win final vote he set for next week. bargain-hunting in china. david rubenstein sees better investment deals in asia than the u.s. and want to cash in hotel reward points for a luxury cruise? the consumer be possible as ritz-carlton gets into the yacht business. let's get a check on the markets , it is friday, off the rebound and midsession and abigail doolittle. abigail: we are looking at gains. down, trading higher -- in the