jonathan: jonathan ferro with 30 minutes dedicated to fix income. this is a bloomberg real yield of it -- real yield. ♪ banks --, central chair yellen says it looks rich. words, did investors misjudged the speech? credit is on track for the past record. issue, did investors misjudged mario draghi's speech? >> i think it was eloquently put.

>> the words were confusing, to be honest. >> this was a titanic shift we haven't waiting for. >> i'm not sure the market misinterpreted it. there was a very clear shift relative to the last policy meeting. it was a dramatic tone. >> that a tightening is not really a tightening and i think the hope was, if you explain it that way, rental market will not get into -- >> i did not read the statement to be anywhere as near as bearish as the market was taking it. i think it was a signal from mario draghi that even if there support and tailwind, the central bank is still there. >> they need to get going early here. jonathan: soap was it eloquent or confusing? -- so, was it eloquent or confusing?

boston, senior portfolio manager with the wells fargo asset management. let's get to the quote itself. these are the words that seem to move markets. the ecb four in portugal. as the economy continues to recover, the policy stance will become more cooperative and the it --l bank can accompany not in order to tighten it, but to make it broadly unchanged. jonathan: there with the words of president draghi. big moves in the bond market. treasury, yields, buns plunging. did the market misjudged the speech? it kind of did. guest: it interesting because

what the draghi said was 100% correct. they are not looking to tighten, they are looking to remove excess accommodation to keep accommodations at levels that are consistent with where financial conditions need to be. i did not deal his talk as overly hawkish. i think it's a reinforcement of what he has been saying, but it came at a time when the marks were surprised. people were expecting a dovish comment. the data has been decent globally, but nobody was expecting it to come out so strongly put right mario draghi and it caught people by surprise. guest: i would have to argue that this is not necessarily about the short-term horse of policy, but rather deepening the functions,y response which for the last five or six years since the whatever it takes speech, no matter the data comes out, ease, these come at ease.

the policyrning to outlook going from flat to steeper, not naturally where it was 10-50 years ago. been aggressively pricing from central bank to central-bank, rather it's the bank of england or federal reserve. across the board, excavations increased on the back of the central banks. do we now have a market that may be a little bit more in line with the reality of the direction of these central tanks -- central banks, this week? guest: i think the central banks will maintain dovish posture. they are concerned about rattling the markets. we have seen this pattern before where they have strong talk and week action. i think it's a military reaction to the market but it will not be a material change in rates.

i think it's the beginning of an upswing. jonathan: my colleagues pointed out we have this strange emerging paradox where inflation expectations are diminishing or rolling over. yet central banks redefining, recalibrate their reaction functions. how delete make sense of that? guest: it's certainly puzzling. i have a chart that looks at the five-year forward inflation rates and in the eurozone as compared to where the bond has been trading. if you take a look at the last two weeks or so, you can see the increase in inflation expectation has been an inch short the move, where the reaction in one's has been five inches worth of a moves. that's an extreme reaction, considering with had swings much larger in terms of inflation expectation then has occurred in the last pubes. jonathan: if you want to enter who holds the key to global

rates, did you get the answer this weekend? guest: i don't know if i got the answer, but the first thing i look at when i come in the morning is a, where are bundled and gilt yields? dictated by been what other banks are doing. today is a great example. core pc comes out at 1.4%. yields are higher. jonathan: as expected. guest: absolutely. but it's been on a downtick for the last several months. where it's position mattering more what the ecb and bank of england is doing. more so than what the u.s. data is telling us. jonathan: was on the curve -- what is on the curve? guest: perspective really matters a lot here. people talk about the yield curve flattening in the u.s. and certainly are have been historical. if you look at the last hand part of the screen in 2004, where the fed was tightening

policy to slow down the economy and kill inflation. today, the yield curve has been flattening since 2011. aside from a small blip we have had from 2013, we have been in a flattening trend since 2011. i do not think the fed, which has been flatlined, the fed is not trying to tighten policy. they are trying to remove access -- access a commendation. ccomodation. jonathan: we have a change in the way the curve is flattening. last year it was a long duration, now we have a bear flat. how does that shape, do you think? guest: the front and is pending to the point where it follows where the fed will tell it and it's going to follow the data. the back end is for you to move more is on expectation.

depending on where those inflation expectations though, so far we have been in a low, that is going to produce a flatter curve. qe, allthe excesses of the bonds that central banks have bought, that's keeping the demand or supply duration very low in the markets and that's keeping yields very low. jonathan: how important is that for the federal reserve that we have an anchor at the back end of the curve? does that give them more accommodation to move? with a look at the shakeout this week, the tightening of financial conditions, and on the periphery, is that an automatic stabilizer before they get out of the corner? guest: it does them more fun stability and they could try and raise short rates. that's what's ability a did not have. it does not change the fundamentals, which is, their actions will have very little

effect on the real economy. it's more trading reaction. as long as inflation is low, it will be pinned to low rates. jonathan: you agree? guest: i think we don't go into our numbers and hideout. they have this august hand by a long shot and so far, the exit path or wind down path that was discussed in june, really does not include any management on the back end of the yield curve. one thing lost in the equation is, each year that progresses, the fed stock folio comes shorter in duration, whereas the markets are extending right now. there is still plenty of duration and i am not too concerned about central bank and not in u.s. dollar terms. the bigger source of compression changes to the supplementary liquidity ratio rules from the federal reserve.

guest: i think we cannot move past the high level of cash for the yield. one ways to pick it up is to extend duration. once we see positive growth environment where inflation is not taking up, you will see more demand for longer duration assets. guest: we started this conversation about the 210 spread and historical basis, we are only roughly enough 40th or 50th percentile of what that to 10 spread is, so all this drama a week ago about a flattening yield curve, only a little bit below average. jonathan: we have an opposite story of the one last week. now the yield curve is going steeper. are we trapped in this range of 215 two to 60 and the kind of bounce around between it? guest: we just published the 2017,d for the balance of 2018, and took down our forecast range from 220 down to a to 60.

the primary reason for that is inflation in the united states is essentially a random variable in the short-term and it down shifted a little bit and pulled the curve down with it and we are stuck in that range. jonathan: do you agree with that? market yes,mpy bond and this may be an inflection point. guest: that's right. from the end of 2008, we have been in this trading rate and we had not broken out on the upside. it's because inflation is whereed in a low rate, so can they go in the intermediate term? nowhere. stick around. coming up next on this program, bloomberg real yield, the option lock. a record year of investment rates apply.

for our viewers worldwide, you are watching bloomberg. ♪

♪ jonathan ferro, this is bloomberg real yield. let's head to the auction block. deals.ed about a few get one came back to the market quickly. charter communications sold at $1.5 million a bond. grade, wevestment have of course hit the midpoint of the year, 2017 sales of corporate bonds are on track to surpass 2016's record, total volume reached $768 billion, 4% ahead of last year's tally at

this time. treasuries, $20 billion worth of its haven't year notes through a yield just over 2% with a ratio of 2.46, the lowest since january. and below the 2.53 average. earlier this week, we heard from the fed chair and in fact locally, we had a series of central banks worried about financial stability. rich asset prices, and risk. do you take notice of what they have to say about asset prices? isst: what they are saying that they are actually sensitive to upsetting the financial markets. most of the policies they followed have caused money to flow into financial assets rather than raising the economic growth rate. of course they are concerned

about the reverse happening, lower financial asset prices cascading into the economy. the real economy looks good at this point. jonathan: but what interests me in terms of risk, equity fell out a couple days, bonds are plunging a couple days, investment credit hung tough. height yields are ok. ig spreads, still tight. why was credit performing so well when the rest of the market was experiencing a series of mrs. -- misses? guest: the likelihood you will capture that kerry is still pretty good. that's the way to markets are thinking. where else are we going to go for yield? height yields, security? there is a lot of different things you can do. has been an insatiable demand for fixed income product, now we will see 12 months from now if rates rise. that has to be the catalyst.

you need to see rate rise and the shock, or you could see financial event take place. jonathan: was that a sign of resiliency or complacency? guest: i want to pull to jesus of your comment apart. on the id side, one of the keys here today was the source of issuance, increasingly we are seeing tech companies becoming the dominant net issue of new debt and guess what was buying that debt? in many cases, tech companies. i will take on apple for no reason. they buy bonds and issue bonds in the u.s. and provide various functions to tax arbitrage. they are both the source of supply and demand. if you strip out that number, is there an increase in supply for 2017? jonathan: is that a story here?

maybe something else is going on? guest: i think it shows you there is a continued voracious amanda for hiring securities. as far as looking at high-yield markets, so far is here for the last four years, over half the gross issuance has been to take out other debt, pay off bank lines, or high yield bonds. cookies are going crazy in the market, they have improved their balance sheet, that's what makes the spread so resilient. fundamentals are good. guest: at the same time, spreads are not historically tight. i talk about the 210 spread, the investment spread is in the 40's percentile historically, including states where spreads were high during the financial crisis, but nonetheless, that does not scream written to me. jonathan: how do you think about that, as the spread or absolute nominal yield?

because nominally, they are incredibly low. in the i.t. space, we think about everything in spreads. in the height yield space, because there is a floor for return on investors, i would have to argue it nonlinear to some degree, but high yields are relatively tight, not as low as 2014. guest: i think you are hitting on the right question. when you construct a portfolio and think about putting a portfolio of wants, there is a duration component. the lower yields go and the tighter it spreads, the more duration you have. you are exposed to a shock higher move in rates. that's something but we do at morgan stanley is balance that risk. a lot of the funds, we strip at that interest rate component and isolate the credit component. in some cases, when we look at spreads and yields, they can be

attractive for a. period of time. jonathan: d.c. the risk around it. ? guest: when i look at high-yield, you are taking fundamental credit risk. that's how you lose money. longertter to have a duration risk in height yields because it is not in the risk of rates. 360 basis points, which i don't think is coming and when you look at the default rate at 2%, that is a low risk market. you are gain paid to extended duration. jonathan: i get the rest of the last 10 years has been interbank policy. his central bank still your friend? guest: they are certainly going the wrong way to be good friends. with the federal reserve tightening, the next step the ecb tightening. about they unclear

next step for the boe. the only front we have is over in asia, the bank of japan, for the most part right now. that said, whether a central bank is supporting or detracting from risk demand in a given market, it's defined by whether they are tightening faster or slower than what is priced in and what is priced in right now for most central bank action is a relative pace of tightening. if we do get tightening that is not priced in, it closes a modest problem for risk assets. i doubt it is a huge one. the issues for height yields are about valuations or ties to the equity markets rather than bank policy. jonathan: everyone seems to be confused about this policy. stick around with us. get you up to speed on the markets this week. what a week it has been.

yield hide by a margin of three basis points, the big move further down the curve, 13 basis points higher. as we get back up to 2.82 on the 30 year treasury. the final spread on the week ahead, the first meetings of the president trump and putin, plus a jobs report as well. you are watching bloomberg real yield. ♪

♪ jonathan: from new york and viewers worldwide, this is bloomberg real yield. it's time for the final spread. we have a shortened trading week in the united states with an early close on monday and markets most entirely on july 4. the fed will release minutes a little bit later in the week. also the sales and jobs report will come out of the u.s.. president trump and putin will be meeting over in germany. a look ahead to next week,

morgan stanley investment management and wells fargo asset management. jim, the heavy lifting for the bond bears comes the central takes it are they going to get it from the table this week? guest: i think we will see recovering from last time. 175,000 payrolls is the survey estimate right now. i think that is a good number. anything about 120,000 is a good number. tost: markets are not going treat 120,000 as a good number. the bias here is for economic upside surprises drive further up until july 14. jonathan: we will do the rapidfire rent. short questions, short answers. did the market misjudged the words of draghi, yes or no? guest: no. guest: natatorium.

.-negatory guest: yes. jonathan: bank of england or ecb? guest: bank of england. guest: guest: bank quickly. guest:ecb. bunds or high-yield? guest: bunds. guest: bunds. guest: high-yield. jonathan: see of next friday. from new york, this is bloomberg real guilt. ♪ -- this is bloomberg real yield. ♪

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