jonathan: from new york city, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ draghi's president dovish words for european bonds. trade struggles to find buyers. a 10 year option has the weakest demand in nine years. and counting down to the fed decision. the inflationto goal undermining the case for another rate hike. we begin with the big issue, a dovish draghi. ande need to be persistent,

patient. a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium-term. also unanimous in communicating no change to the forward guidance. we only have to wait for wages and prices. setting nonimous in for when to discuss changes. the last thing that the governing council wants is for n unwanted tightening of the financing conditions. jonathan: joining me around the table, the cohead of global portfolio management fixed in and a columnist for

bloomberg gadfly, and the chief investor at hyman capital. let's begin with you, mike. yesterday and threw two today, this interesting dynamic for the first time in a number of years. a europe stronger, a periphery bid. can that continue? >> i think the euro is the currency that is very hard to invest in. you have had the situation where win, andin, taleils i that doesn't last forever. you need to look at the fundamentals of the european economy, and what is the result of the ecb? the bottom line is that the resolve of the ecb in terms of maintaining financial conditions is significant. the market was safe a month ago in terms of the ecb moving more hawkish with accommodation. it's not likely to happen when you have an inflation currently

running in europe at the path of the ecb target and you have significant weakness in the southern part of europe. jonathan: when he talks about an unwarranted tightening of financial conditions, is that a message to the fx or bond market? >> for the bond market. he's saying, don't get your hopes up. we are not going to let yields go up. we are going to create the bid to keep yields low. at the same time it makes me wonder how much it will go up in the eurozone, which feeds into some legitimate reason to get bid up, and meanwhile, how much is the euro strained, because you see the dollar sink as prospects for fiscal stimulus plans have faded. jonathan: do you share those the is? >> yes, i do. i think it has been interesting to watch the euro strengthened dramatically as draghi has tried

to take back his comments, but i think the market is certainly going the other direction. that is going to put pressure on the economy, and it is positive for our economy and stock market. of what they are doing with their fixed income market, with their sovereign market, getting rid of it for a changingod of time, that focus on whether we will have negative rates in europe, i think it's a masterful signal for what will happen with monetary policy. jonathan: from the federal reserve, they would say this is the loosest panic in history. surely we are about to see the loosest timing in history from the ecb. >> i think in terms of europe, i don't think it's a great concern to continue to have easy policy. you have the haves and ha

ve-nots, northern europe performing well, southern europe poorly. the bottom line is the ecb will continue to institute policy for the weakest link, and right now it will be the periphery. expect to continue to see accommodative policy. i think europe needs it. on the other side, in the u.s., and those comments are accurate, we have an enormous amount of complacency across financial markets. there's confidence that the fed will be on a light path towards normalization, and the bottom line is you can have divergence. the whole theory right now is that the ecb will have to be easier, the u.s. as well, global inflation. you can have diverging economies. when you look at the u.s., you are seeing strength. it's concerning because everybody thinks the fed will be there forever, and they are not. jonathan: you talked a little bit about the value opportunities across economies.

this chart tells the story. walk me through it. >> this chart is showing the inflation differentials across our economy. while not overly significant, you are seeing a trend downward in terms of inflation. we see the united states moving down to 1.5%, 1.7% area. we see the eurozone at 1.1%. the bottom line if the differences are pretty significant. the u.s., where we think it is a transitory decline, we will start to see inflation push back europe, yout in have half the target and you were in a situation where you have a labor market that is very divergent. you have low inflation and unemployment in certain areas, and high unemployment and others. we expect that high unemployment to cause inflation to be low in europe and cause the ecb to be accommodative.

>> i am struck when you are talking about how the ecb continues to be supportive of the weakest link. how long is that going to be politically plausible? not that long ago, we were talking about italiexit, frexit, and that all disappeared with macron, but will we continue to hear about this? >> i think you will see a rapid, over the course of the next two to three years, convergence 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 to inflate, and as a result, it's not sustainable over a long period of time to have extremely divergent growth and have fiscal policies run by the country to be different than a joint monetary policy. in the end, the whole euro construct comes into question. jonathan: mark, can you justify any kind of pulling back on this qe program in the fall,

september or october? let's say we get to september, can you justify on the economics alone? >> absolutely. i think the inflation picture and what is happening now is giving the fed the amazing opportunity to shrink the balance sheet. their goal, what they need to do for the next three to five years,'s strengthened 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 market, that as they exit the balance sheet, they can be doing it at the same time draghi is pivoting to a taper and the japanese are already full out, there is nothing more they can do from a monetary policy standpoint. i think it will be foolish for the fed not to start to exit as quickly as possible, to start to shrink the balance sheet, because 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 into the market and offered an unlimited amount of mobility. there are different forms of accommodation occurring among central banks, and they have a very different strategy that what you see in the u.s. somenk japan has had improvement in growth to modest improvement in inflation, but they are still very, very, way behind. they still have a significant amount of recapitalization to get lending and the economy going. 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? the boj hanging in there? >> well, the question is, when will they run out of assets to buy? doesn't the boj own the entire

japanese stock market? etf, and60% of the they are controlling their 10 year yield. the mystery is taken away. .onathan: maxwell, mark, lisa, coming up, the auction block. the issuesinvestors, facing the prospect. this is "bloomberg real yield." ♪

jonathan: from new york, i'm jonathan ferro. we want to head to the auction block, where i have to say, not

much action recently. starting in greece, and has returned to the bond markets partly due to a debt cap set by the imf. a lifeline may be available as they say yes to a bailout "in principle." another bond issue, a $200 million sale. high-yield investors finally getting the upper hand after years of central bank asset buying, pushing back against some of these issues. in the united states, a 10 year auction flops. billion, the lowest amount of nine years, bid to cover ratio. nearly 40% of the loss, with a few others. still with us, maxwell, mark, lisa. mike, with the lack of volatility we have seen. the lack of action, the lack of

issuance. yesterday has been stellar but the last couple months -- what do you make of it? >> a good time for vacation. jonathan: there we go. [laughter] >> it's a function of unprecedented central bank accommodation on a global basis. you can get very comfortable with that, and i think for the for siebel future, the central banks will continue to be extremely transparent, keeping volatility low, and risk assets look ok for the foreseeable future. i really do believe that where we are is not going to last forever. to make investments based on what's happened over the last eight years, when the central banks, particularly the fed, is saying we are changing the game, we are going to stop buying every asset -- when they take the long end out of the market,

they are taking volatility out of the marketplace. when they put it back, particularly mortgages, investors hedge the volatility, and that causes it to spike. to assume that this trend will continue is an error. the bottom line is you are not getting compensated. you have an incredibly flat yield curve, a credit spread that is tight. you are not getting compensated for where you are. jonathan: lisa, you have written about it as well, investors sitting on their hands? >> well, right now you have spreads, the extra yield people are receiving to own investment grade bonds over benchmark rates, shrinking to some of the narrow was levels we have seen in the post crisis era. to your point, i want to make a point about the volatility. if you look at the move index, implied volatility in treasuries, the lowest yield on record, the last time we saw a race like this was right before

2007. this is june, 2007. you saw what happened after that. this isn't going to last forever, and the more people get complacent saying, look, we don't think we are getting compensated, 61% of investors from bank of america believe the spreads are too rich. --s is going to mark, is it pushing it to take more risks than you would like to? >> no, not at all. we are getting defensive end we have been taking checks off the table. the comment around summer in tourists i think is very to what is happening in these marketplaces. you have an amazing amount of flow into the u.s. corporate credit market from tourists overseas. the question everyone is asking is what is going to happen when they go back home? is draghi telling them it is

time to go back home and get out of the market? i know the japanese have a huge amount of exposure. that is why we are getting defensive. valuation is not there. the complacency, does that change? i don't know, but at this point, you aren't getting paid a lot to take this risk. jonathan: i want to get into that, people talk about how they have been pushed into treasuries. not many people talk about the corporate buying program of the ecb, and have the same thing is happening to u.s. credit. do they need to think about it more? >> we have been talking about it for a while. i agree with the point about the tourists and how long they stay involved. they stay involved until they stop making money, until they stop assuming the fed will lower rates. i think the fed is not going to continue to lower, unless you see -- they are not going to bailout investors from outside the u.s. i think there is going to be a

change. it slowed down on the margins. there are yields out there that are attractive, but they don't just cash, you look for opportunities. i think the emerging markets are very interesting. we talk about lofty levels in u.s. equities and developed market bonds, but the emerging markets are still very attractive. you look at local currency, you still have really attractive yields, north of 6%. you actually have real, positive yields. very high returns. we think the emerging markets are posting better, particularly from a rate perspective and for currencies, which have underperformed massively. and the underperformance is a good in going forward, because you have more competitive economies, and a situation where a lot of these countries have reduced debt levels by devaluing currencies. most currencies are issuing debt in local currencies instead of the dollar, so we think there's

a lot of opportunity. global growth improved both the developed and emerging markets. we think the fault risk is relatively low. jonathan: lisa? >> do you think there is any value left in hard currency, because we see a flood of cash into these indices, brought indices, of u.s. dollar emerging markets credit. some nations have been deleveraging, others have not. the credit quality of the index has been deteriorating. >> you have the entire food chain of capital flowing into the u.s. market. it started out with treasuries in mortgages, and then it went into investment grade credit. now you are seeing the flows into emerging markets after many years of significant outflows, so it is concerning that flows have been significant. that is typically a pretty negative signal. i think the hard currency debt is pretty significant, and

there's not as much value there. jonathan: mike staying with us, alongside mark and lisa. let's get a check of the markets, where we have been throughout the week. are grinding lower by 10 basis points on the u.s. 10 year, 11 on a 30 year. flattening the curve once again. still ahead, the final spread. janet yellen's difficult task of unwinding the balance sheet. it is the week ahead. this is "bloomberg real yield." ♪

jonathan: from new york, i'm jonathan ferro.

it's time for the final spread. coming up over the next week, the one to watch. that share janet yellen, you will get a federal reserve rate decision and a statement. that comes on wednesday. big issuers reporting earnings throughout the week, at&t, deutsche bank, shell, and the first read of u.s. second-quarter gdp. that will be friday. a quick look ahead, still with us, mike, mark, lisa. mark, i want to begin with you. talk about the lousy auction we had earlier this week. the price of reflation, not cheap enough? >> look, the inflation numbers have been very poor, right? the question is, does that continue to be the case as we roll forward. we look at a very interesting graph of gdp back 18 months versus the cpi number, and there is a pretty good correlation. we had this soft patch going through, and that turned pretty hard in the second half of 16. the fact that the health care

bill died, you are going to have more medical inflation. i think inflation comes back pretty significantly in this market some point, like in the beginning of 2018. that will change the dynamic for what is happening, to your comment around demand for inflation protection. jonathan: you talk about the risking. risk -- reward, is that where it is? >> not yet. from moderately overweight a long-term strategic standpoint because we think later this year and next year we will see a resumption of inflation. we are in a negative seasonal period in terms of inflation, and you are in a situation -- there's not a lot of desire to but as weype of risk, move later on and see more weakness, we think in the end there is a lot of fundamental value. jonathan: we are going to wrap things up with the usual, do the

rapidfire round. one word answers, if possible. can you belong the periphery and be long the euro? yes or no? >> no, thank you. jonathan: mark? >> no way. jonathan: lisa? >> i'm not going to disagree. [laughter] jonathan: retail or energy? mike? >> oversell retail. jonathan: mark? >> he's right, retail. jonathan: lisa. >> agree. jonathan: the fed decision next week. go to lunch or stay at your desk? >> go on vacation. jonathan: mark? >> that's right, vacation. jonathan: lisa? >> happy friday. [laughter] jonathan: guys, great to have you. mik, e, mark, lisa. that does it for us. from new york, we will see you next friday.

worldwide, this is "bloomberg real yield." ♪

david: do you get tired of people asking you what it feels like to be a woman ceo? mary: it's a question asked more than it should. david: do your children treat you with more respect? mary: my son reminded me last mother's day venture most important job is mom. david: the government put some money in general motors. did the government get its money back? mary: i will tell you that at general motors we will be forever grateful for what the government did. david: do your board of directors let you go in a driverless car? [laughter] mary: if it is from general motors, i think yes. >> would you fix your tie, please? david: people wouldn't recognize me if my tie was fixed, but ok. just leave it this way. alright. ♪