jonathan: from new york city, this is jonathan ferro. this is bloomberg real yield. ♪ coming up, president draghi -- his words fall on deaf ears elsewhere. to --ion trade juggles struggles to fly -- find buyers, and counting down to the fed's decision. we begin with a big issue, a dovish draghi to push back

against markets. ande need to be persistent patients. a very substantial degree of monetary accommodation is still needed for underlying and nation pressures -- inflation pressures to build up and support headline inflation development in the median term. we are also unanimous in communicating no change to the guidance. we only have to wait for wages and prices, we are unanimous in for setting no precise date winter to discuss changes. -- when to discuss changes. the last thing the governing council may want is an unwanted tightening for the financing conditions. jonathan: joining me around the table, head of the global -- and the credit columnist for

bloomberg gadfly. over in dallas, the chief investment officer having capital management. begin with you. yesterday and through today, this very interesting dynamic asserting itself. euro that is stronger in the privy that is thick -- that is stronger and the periphery that is thick. next the euro as a currency that is very hard to invest in. it is recently passed in a situation where had they win, tails i win on the euro, and that does not last forever. you need to look at what is going on. the fundamentals of the european economy and what is the resolve of the ecb? is the resolve of the ecb in terms of maintaining was financial conditions is very significant. the ecbet was viewing as being a bit more hawkish one month ago, and moving with the fed as far as moving accommodation, not likely to happen when you have inflation

atning in your up -- europe half of the ecb target and weakness in the southern half of europe. i do not think it can last forever. jonathan: lisa, is this a message to the affects market or the bond market, or both? because he market, is saying let's not get your hopes up. let not yet -- we will not yields go up too high. we will keep them low. it makes me wonder how much it will allow inflation to pick up in the eurozone, which is supportive of the economy, and looking for a legitimate reason for the euro to get up, and also how much is the euro strength? simply, it is a dollar story. we have seen the dollar sank as prospects for the fiscal stimulus plan here has faded. >> i think it has been interesting to watch the euro strengthen dramatically in here as draghi has tried to take back

some of his comments. but the market is certainly going the other direction. that will put some pressure on the euro economies. for lisa's point, that is actually positive for our economy and stock market. this is dynamic of what they are doing with their fixed income there sovereign market, and getting rid of this for a long amount of time and changing that scene, the focus on whether we will have negative rates in europe. it is a massive signal really for what is going to happen with monetary policy in different regimes. jonathan: mike, is this something to be nervous about? this is been elusive timing in history. -- the loosest tightening in history. certainly, from both this and the fed. euro, i dorms of the not think it is a great concern to continue to have easily policy -- easy policy and euro.

love haves and have-nots in europe, so we have eastern europe performing relatively well, and southern europe performing poorly. so the ecb will have to continue to consider policy for the weakest link, and right now it will be the periphery. we continue to see, native policy there. i think that europe needs it. on the other side in the u.s. and mohammed's comments are very accurate, we have an enormous amount of complacency across financial markets. there is confidence that the fed will be on a light path toward normalization, and the bottom-line is you can have divergence, and the whole theory is that you cannot. the ecb will have to be easier, we have global inflation as well, and divergent economies. we are seeing strengthen american economies, best in american economies come and everyone thinks the fed will be there forever but they are not. jonathan: you talk a little bit

about the relative value opportunities across major economies, and here is a chart that has the story. walk me through it. mike: this is showing the inflation differentials across our economies. while not overly significant, we are seeing a trend downward in terms of inflation on a global basis, and we know that is happening there. the united it is moving round the 1.5 percent, one .7% area, we see canada at 1.4%, and the eurozone at 1.1%. a think the u.s. is transitory area, pushing back up to the 2% area due to the tightening of the labor market, but in europe you have the target and you're in a situation where you have a labor market that is very divergent within europe. so you have low inflation, low appointment in certain areas, and high and employment and others -- low employment in certain areas and high unemployment in others.

lisa: i am struck when you're talking about how the ecb continues to be supportive of the weakest link. how long will that be politically possible? not too long ago, we are talking about in the tally exit -- in italy , and that has disappeared with macron's election. mike: unless you see a rapid convergence in the next 2-3 years around growth, unemployment, and inflation across the eurozone, you will have significant political problems. in the end, germany does not want to allow for their economy itinflate, and as a result is not sustainable over a long amount of time to have extremely divergent growth and then having fiscal policy run in other countries to be different than a joint monetary policy. so in the end, the whole euro construct comes into question if you continue to see that growth all over. jonathan: can you justify any

kind of pulling back on this qe program in september, october, the fourth quarter? let's get to september. can you justify on the economics alone at this point? mohammed: absolutely. i think the inflation picture and what is happening right now is getting the fed an amazing opportunity to start to shrink the balance sheet. their goal, or what they need to do for the next 3-5 years is to shrink the balance sheet and normalize the curve. amazingly, with rates so low, they can do that without much pain. that has been the worry of the theet, that as they exit balance sheet they could be doing this at the same time that draghi is pivoting to a taper, and the japanese are already full out. there is nothing more they can do for my monetary policy standpoint. so i think it would be foolish for the fed to not start to exit as quickly as possible, to start to shrink the balance sheet. let's face it. they have to reload their guns for the next recession.

and they are way late in doing that, because it will take a long time. jonathan: why does no one talk about the boj anymore? they came in earlier this week and offered unlimited amount of ability for people to sell, sell, sell, and buy.buy, mike: there are different forms of accommodation occurring in central banks and they have a very different strategy than the u.s. and in europe. has had some improvement in growth, some modest improvement in the inflation picture, but they are way behind. they still have significant amounts of recapitalization has to occur in the banking system to get lending with the economy going. so you will see different forms of stimulus coming out of japan for the foreseeable future. jonathan: is that enough to keep the central bank in the market, lisa? lisa: the boj, the question is when will they run out of assets to buy? don't they own the entire

japanese stock market at this point? , they the etf right now are controlling their 10 year yield, and i think is that why nobody talks about that. the wrister he -- mr. he is taken away. thank you to our guests. coming up on the program, the auction block. capital. costlier this is bloomberg real yield. before we go to break, let's get the first word news from emma chandra. >> some breaking news this hour, trump has hired a new communications director. press secretary sean spicer resigned in protest over scare emoji's hiring. arramuchi's hiring. from bloomberg, this is -- from

new york, this is bloomberg.

♪ jonathan: from new york, i'm jonathan ferro. this is bloomberg real yield. i want you had to the auction block, where there is not much action anywhere. starting in greece, the return to the bond markets postponed. a lifeline may be available as to theds bought said yes bailout in principle. and korea halting its $200 million sellout. finallyld investors getting the upper hand of the years of central bank have been buying and pushing back against these issues. states, this

auction absolutely flopped. offering $40 billion for the lowest amount of nine years. others, they apparently seemed to do not once. our guests.s, lack oft's start with a volatility that we have seen, the lack of action, the lack of issuance we have seen. what do you make of it? it is a really -- mike: a really good time for vacation for people in the industry. [laughs] unprecedented central-bank accommodation on a global basis. you can get very comfortable with that, and i think for the foreseeable future, the central banks will continue to be extremely can parent --

transparent, keeping volatility relatively low. risk assets are ok for the foreseeable future, but i fromve that where we are this perspective -- it will not last forever. to make investments based on what has happened when the central banks, particularly the fed, have said we are changing, we are changing the game. we are going to stop buying every asset. when they take that out of the market, these treasuries and mortgages, the take volatility out of the marketplace. when they put it back, thatcularly mortgages, causes volatility to spike. so i think the bottom line is you are not getting this a lot of -- across one of the market. spreads that are historically tight, and not getting compensated in terms for the spike in the fed. jonathan: and you have written

about investors sitting on their hands as well, lisa? lisa: you have the extra yield that people are receiving to own investment grade bonds over benchmark rates shrinking to some of the narrowest levels we have seen in the post crisis era, and to your point, i wanted to make a point about the volatility. look at the move index, which implies volatility in treasuries. the lowest level on record. the last time we saw rates like this was right before 2007. 2007.s june so this will not last forever. the more people that get complacent, saying look, we do not think we are getting compensated for the risk that we are taking, 61% of investors surveyed at bank of america believe these spreads are too rich, and they keep buying because they think everybody else well. this is going to end badly, but people do not see it happening. is this pushing you to take more risks than you would

like to? mohammed: no, we have been getting defensive and taking table,- chips off the but i think this is very interesting as they correlate to what is going to happen in these marketplaces. of had an amazing amount flow in the u.s. credit market from overseas. the question that everybody is asking is what is going to happen when they go back home? is draghi telling them it is trying to go back home, back to europe and get out of the market? i know the japanese have a huge amount of exposure in id credit, but that is why we are getting defensive. valuation is not there. the complacency -- does that change apple i do not know. but at this point, they are not getting paid a whole lot to take a lot of this risk. jonathan: i want to get into that, because they are saying that people are getting pushed into treasuries. not many are talking about the corporate buying program at the ecb and have the same thing is

happening with u.s. credit. do they need to think about that more? -- we have been talking about that for a while, and i agree with the point about the tourism and how long they stay involved. they will stay involved until they stop making money and assuming that the fed will lower rates whenever they start to lose money. i think the fed will not continue to lower and less we see a significant slowdown in the u.s. economy. they will not bailout investors from outside the u.s.. i think there will be a change. it has slowed down on the margins. these margins are attractive, and we do not just go to cash when we are defensive, we look for opportunities. the emerging markets, both debt and equity space, are very interesting. we talk about lofty levels in u.s. equities and in developed markets bonds, but the emerging markets are still very attractive. when you look at currency in emerging markets, you have attractive yields north of 6%, and real positive yields. so very, very high real returns

there. we think the emerging markets are pushed better, not just from a great perspective but currencies. they have underperformed massively for the past three years, and that is a good thing for the forward because you have much more competitive economies. and you also have a situation where a lot of these countries have basically reduced their debt load by devaluing their currency. and most of these countries are issuing most of their debt in local currency rather than the dollar, which with a historical -- which was a historical mismatch. so we think that the fault risk -- default risk is relatively low. jonathan: lisa? lisa: you think there is any value left in hard currency? we have seen a flood of cash into these indexes, broad indexes of u.s. dollar emerging credit. some nations have been deleveraging, and others have not. and the credit quality of the index has been deteriorating. michael: you have the entire

food chain of capitalists flowing into the u.s. market. it started out with treasuries and mortgages, and then it went to investment grade credit. now are you are -- now you are seeing the flows into emerging markets after years of significant outflows. so it is concerning that these have been significant. that is typically a pretty negative signal. i think the hard currency debt has tightened pretty significantly, and there is not much value there in local currency. jonathan: stay with us, alongside mark ro khanna and okanaecker it's -- mark and lisa berkowitz. on a 30 year, a flatter curve once again. you know the story. still ahead, the final spread. fed chair janet yellen's difficult task of unwinding the balance sheet and the year

ahead. this is bloomberg real yield.

♪ jonathan: from new york, i'm jonathan ferro. time now for the final spread. over the next week, the big one to watch. the chair janet yellen, you will not hear from her but get a federal reserve rate decision and a statement as well. that comes on wednesday. we get some big issuers reporting earnings throughout the week. at&t, deutsche bank, and shall, -- shell. quick look at the week ahead, our guests. mark, i want to begin with you and talk about that lousy 10 year tips option that we had that option that we had this week. the price of inflation, -- reflation, not cheap enough? the inflation numbers have been very poor, and does that

continue to be the case as we roll forward? we look at this interesting graph of gdp stacked 18 months of versus the cpi numbers, and that is a good correlation. if you think back 18 months, we had a soft patch going through the u.s. economy, and that turned pretty hard in the second half of 2016. and then the fact that the health care bill died, you will have some more medical inflation. so i think inflation comes back pretty significantly in this market at some point. in the beginning of 2018, i think you will change the dynamic for really what is and on yourth rates comments to demand for inflation protection. is the opportunity now in inflation trade? michael: not yet. over risk fromly a strategic standpoint, because we are thinking later in this you see ait --

significant resumption of inflation. you are also in a situation where we have had for really bad -- we think as we move later in the year and start to see more weakness in inflation, we will see in the end a lot of fundamental value there. jonathan: we want to get you and your boxes and to the rapidfire round. one question and one word answers. can you belong the delivery and europe and long bureau? yes or no? michael: no. mark: no. lisa: i will not disagree with them. jonathan: the most oversold sector oh in high-yield? retailer energy? michael: retail. mark: he's right, retail. lisa: i would agree. jonathan: and the decision next week? go on vacation.

mark: stay on vacation. lisa: happy friday. jonathan: i am so happy we have you for the fed coverage of next wednesday. , thatyou to our guests does it for us. we will see you next week at 12:00 new york time, 5:00 p.m. on london. this is bloomberg real yield. ♪

i'm vonnie quinn welcome to bloomberg markets. ♪

from bloomberg world headquarters in new york, here are the top stories in bloomberg and around the world that we are following. u.s. stocks on the dollar sinking today as investors assess the expansion of an investigation into president donald trump's russia ties. banks made this much in quarterly profits. the country was on the brink of financial collapse. plus, general electric shares plunged to the lowest levels in almost two years. a look at the company's weaker as an unit margins executive prepares to depart. abigail, we are halfway through the trading day and getting not much. >> small declines for the major averages on the