jonathan: from new york city to our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, the u.s. economy rebounds, but inflation raises questions about the fed's next move. away with the biggest debt market deal of the year. the market wanted even more. billionaire investor howard marks of oaktree capital issues a warning about current valuations. we begin with a big issue -- fading inflation forces raising questions for the fed. >> yes, inflation has come down.

we have gone through a string of low inflation. i do not think it dissuades the fed from doing what they had planned to do. >> the fact that inflation is being made out the way this and the decision could be driven by it, i assume that they will not be data dependent. it is going to be employment and other things driven, which is doing very well. the fact that they may not tighten or take immediate measures because of low inflation, that is news. >> yellen is getting dovish anyway, but it plays in flat trends and the market has gotten a little short as well. >> i think this is a fed the has to wait until they see the whites of the eyes of inflation before they raise rates again. >> i think we have to understand what kind of environment we are and support being in risk assets. >> there's a lot of complacency in the risk market and i wonder when the fed actually does raise rates that if that does start to reduce the balance sheet if the market does not have to go through some sort of readjustment process. jonathan: joining me is:

andrtson and andrew schulz over at strode and marilyn watson. andrew come i want to begin with you with the idea that we move with price action one week to another week. if you look at the fundamentals, nothing has really changed at all. you can take the inflation data of today and take a month on month inflation data as well and it's just trending lower and lower and reflation causes are faded. andrew: we will have the same conversation next week with payrolls and it built all the excitement in the morning and people slowly forget about as the trading continues. theink you have to look at factors keeping inflation somewhat suppressed in the developed world. in the u.s., with employment where it is, there's not an enormous amount of room comes to wage pressures must increase at some stage. when you look at breakevens that

look at the most recent inflation number, we think there could be a trade with breakevens. colin: i think certainly we have an issue with the fact that inflation is staying so low. it puts the fed in a tough position. they can portray that they would like to raise rates and that is the strategy they would like to employ, but as investors are taking charge here and as we know from some of the information with the respective fed fund future expectations, the odds are lessening lessening as each day goes by that they could attempt another move this year. onathan: marilyn, we had a guest who said the burden of proof is on the inflation easter's. is anything for everyone out there who is long treasuries that would make it uncomfortable this point? marilyn: i think there's a huge amount of demand for treasuri es, yields, and liquidities. they are offering in this

environment pretty decent yields in this environment. there's a huge amount of focus now on the inflation data. i think the market has pretty much priced in that there will be some changes in the investment program. may be announced in september or coming october. it is still our view that the fed will probably raise rates in december. between now and then, there's amount of data to come. jonathan: with the reflation story, we had a really lousy auction the other week. the message in the first to me was that the present inflation is not cheap enough yet. what do you say to that? andrew: clearly it's not a fashionable trade at the moment. we looked at the inflation before and everyone has their view. we know from expectations that no one is expecting a rate hike in september or in the meeting afterwards. ay be a 40% chance in december. the might be some opportunity to

take it manage of it -- advantage of it. jonathan: how do you think about it as well? the central by the market was to be aggressively short treasuries. we look at this trade and see how it plays out. ultimately everyone got squeezed and it was painful. are we on the opposite side of that started? have we gone far enough to do it andrew has talked about? colin: we have gone far enough. clearly there was a squeeze -- no doubt about that. expectations were that rates were going to go higher no matter what and they certainly did not do that. one of the issues that i have that causes me concern is the lack of true wage inflation. even though we are at full or what would be deemed for through employment, we cannot get any wage inflation to stick. that gives me pause when thinking about if this could be a trade that should take place immediately. jonathan: marilyn, it would be great on a program like this to focus just on fundamentals, but unfortunately the central bank we have to discuss as well.

you mentioned the federal reserve. how do you gauge the way balance sheet policy is going to roll out if they do announce and september? do you have any idea from september and the o beyond what the fed policies will look like going forward? marilyn: it's obviously going to be very measured as is a huge amount of volatility that will need to be adjusted. it will have an impact on quantitative tightening and credit markets over. there still a huge balance sheet that will take time for it to reduce the size of that. when you look at a globally, still on the other hand, you have the bank of japan bumping up assets. you have the ecb buying up assets. while the federal reserve will look to reduce the size of its cost overall, you will see globally amounts abides by central banks. jonathan: what you think about the shape of the yield curve and where the market positioning is, end, do weong

think that flattens as we have gone on? colin: we do have to rethink it. it is my expectation that even when securities start to be brought off the balance sheet that we could see some slight steepening from where we are. it goes back to the point you made just recently about the trade and the weight was lifted up the start of this year -- looked at at the start of the year and how investors got it wrong. i know from watching the show and through the markets that if you ask a lot of investors where the next move would me for 10 year treasuries, they would say 2% not 3%. i think that's the flipside of everybody else that came into the year and how they were positioned. the dangerous risk for me would be if a ghost of 3%. -- if it goes to 3%. andrew: the fed wants to withdraw the balance sheet in the subtle way as possible. they do not want to move on

rates because that's too much of a headline risk. they can withdraw liquidity and maybe deflate some of the assets of what we have got across the fixed income markets, particular credit markets. that would be a nice result for them. whether they want to impact the curve, their pension plans to look at. jonathan: and the next segment, we will talk about credit and the prospect of complacency. do you think they should be targeting lose financial conditions are sticking to their mandate and targeting inflation? andrew: i don't think they need to have financial conditions looser than they are. central banks around the world are completely distorting the press of risk, which isn't a good thing longer-term. jonathan: colin will be staying with us along with andrew and marilyn watson from blackrock will be staying with us as well. on the auction block, greece returning to the bond market and at&t delivering the biggest investment grade credit deal of the year so far. from new york, this is "bloomberg real yield." ♪

♪ ferro -- on jonathan i'm jonathan ferro. from new york, this is "bloomberg real yield." i want to head now to the auction block where we saw a few landmark deals throughout the week. we start here in the united states with treasuries twice $6 billion 2-year note sale that for a yield of 1.395%, the highest since 2008. the auction had a bid to cover ratio north of 3%, the strongest since november 2015. on the corporate side, saw the biggest investment grade deal of the year so far and the third biggest deal in history. at&t sold $22.5 billion of bonds

in a multipart offering, said to are drawn almost as free time as many orders as they were securities for sale. to wrap it up in europe, hungry investors welcoming guess what? new greek paper. greek stocks $3.5 billion of bonds in the first output in the markets in 2014. the country paying 4.625% to borrow for five years. to with us to discuss risk and the prospect of andrew, an is colin, marilyn watson from blackrock. colleague lisa abramowicz picking up on the fact that there's a growing trend in credit at the lower quality names are boosting offerings and extending duration as well. how are you thinking about that theme at the moment? marilyn: i think looking at european growth and fundamentals, we actually have a relatively positive the despite the fact that yields are pretty low and there are a lot of yield

investors out there. we see a lot of issues extending duration and not being a for the next duration, what we prefer to stack toown the subordinated financial debt, for example. it offers better value in terms of valuation in terms of yield other than necessarily looking at the extend the duration. jonathan: andrew? andrew: the chart you put up his interesting. if you look at that duration of the day, the quality has to to rated even since june 2014, the post crisis low and credit spreads. the composition of the market has changed. it's bigger from 40 to 49%. the quality of the index is much worse. the duration of the index is a little bit longer. spreads continue to grow higher. it comes back to my earlier point. jonathan: do you agree with that? colin: i agree with that. with respect to the credit

spreads and where they are, sure we are pretty tight levels in both investment grade and high-yield, but they can go tighter than here. for the reason is to what marilyn pointed out and also enter is the danger, in my opinion, is more duration than the absolute credit. that being said, where do you take spots if you want to invest in the income market if you have to? i would pick the high-yield space. jonathan: andrew, this point, let's look at the at&t deal. there is a trench that go away at 2.4 percentage points above treasuries. it's not insanely tight, but what strikes me is the 41 your path. analystled to find an that will coming what happened in the next quarter next year. try telling me what's going to happen in 41 years. how much risk has been assumed with a deal like that? andrew: if you ask the three of us, none of us would advocate passive ownership of that for the next 41 years. if you are an active manager, there might be a trade there.

the long and is dominated by insurance companies and tencent plans. for them, you can see where it makes sense. the at&t deal was pretty well telegraphed. we had it waiting across the entire curve. it's now one of the biggest issues if not the biggest nonfinancial issue and index. it is something that people needed exposure to. its incredible how well the deal went and their tightening the pricing certainly in the short-term. jonathan: looking at the comments from howard marks of oaktree capital earlier this week and his latest memo, he was warning about complacency. you take out a netflix issue. he said it's an equity linked digital content investment totally lacking in upside potential and it's not for us. the fact that deals like this get done easily should tell you something about today's market climate. this point here is that if you take the equity like investment

of netflix, he's asking question as to why that should be reflected in the debt. to some extent it is. if you take a look at quarterly debt of netflix and look at how it is trading, it is trading below the market pricing at the moment. it is trading below where spreads are elsewhere. wise the netflix curve compared to the quarter market? people get excited about the name. does that concern you? we have averall relatively positive view of technology, cable versus some of the more traditional sectors. we actually think that technology stocks and bonds are having a huge impact. these companies are really from the mentally structurally changing the way that investors can generate returns and how really economics globally are evolving. if you look at netflix or amazon or any of these huge technological companies, they continuing to invest in

continuing to innovate. as long as they continue to push the boundaries on that forward, we are seeing there is still volume to be found in technology. and speaking to these companies that are driving for growth and change in the way people do business. jonathan: that sounds like an attractive equity proposition. wise that an attractive debt proposition? marilyn: on the equity side, if you look at the s&p 500 and financials and the composition from 10 years ago to today, there has been a huge increase in the size of these tech companies and also health care and the like. in terms of debt, if you like equities, i think the debt is also comparatively attractive. i think on a long-term basis that we continue to like these and we see the evolution of the consumer will continue to point toward increasing evaluations for these companies. jonathan: something i want to talk about his high-yield and you talked about maybe being long. look at the way europe is trading right now. european high-yield, if you look at the barclays high-yield

index, it is the tightest in 10 years. how much tighter cannot index get if the ecb is going to pull back? colin: it can still get tighter. we might be talking about the tail end of a handful of basis points, but i do think it could get a little bit tighter from here. i think the key thing to remember here is that it could be possible that we are near the end of a trade, but it could still have duration left to it. when you point out the words that howard said about netflix, part of what was in his note was his admission of oftentimes you can be very early to the right call. i still feel that way really about high-yield. it could be petering out, but there's still a long process left. jonathan: it's better to leave too early then hanging around too late. i would ask if the risk you are assuming is worth it. colin: it's worth it if it's a while last th

because your alternatives could be what you not want to invest in. as marilyn pointed out earlier, we are certainly in an re ournment where the yield hungry and bonhomie investors across the world. at some point, there could be a judgment day, but i don't think it will happen for a while. andrew: i don't particularly agree. i agree with howard marks that you need to position before it happens. by the time it happens, there will be a very small door that everyone will try to get through to get out. the challenge with things like high-yield is that you really don't want to beat your allocation to the asset class percent. you want the asset manager who will pick the little gems in there. it is much about asset classes and it's only high-yield per se. jonathan: colin robertson lton ande andrew chor i'm pleased to say marilyn watson from black rock stays with us.

look at treasuries. yields just a little bit higher by single basis point. by six on the 10 year and 10 on the 38 year yield. still ahead on this program, the week ahead features of bank of england rate decision, which apparently is not in on decision , and the u.s. jobs report as well. it's payrolls friday just around the corner. this is "bloomberg real yield." ♪

♪ from new york city to our viewers worldwide, i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up, venezuela could lead to a step to rewrite its and aitution decision from bank of england. and the u.s. payrolls report

just around the corner. still with us is colin andrtson, andrew chorlton, marilyn watson. what you expecting from the boe you next week? why is the idea of a rate hike even up for discussion? marilyn: certainly the last monetary policy decision was not unanimous. it was a five-three decision. inflation is running above the 2% target. inflation if anything has .urprised to the downside there's a lot of uncertainty around the state of the economy going forward and economic growth in relation to brexit. we don't think that the bank of england is going to act anytime soon. if anything, we are actually long. there's certainly a huge amount of disagreement and concern around the inflation profile, but so far we are seeing that it's not too concerning for the bank having one.

jonathan: i thought this was really straightforward. you except inflation spikes in the short-term and support the outlook. we are not taking a leave from the mervyn king playbook. andrew: i think if there's one country in the developed world that should risk inflation running hot given what the country has to face it the next 18-24 months, it's the u.k. i find it astonishing that it's even a question to be honest with you. we have enough potential risks on the horizon and using monetary policy is absolutely appropriate. jonathan: your call on guilds and staying long, what are the pillars that is based on at the moment? marilyn: economic growth is remaining relatively robust. again, it has proven better than a lot of people expected. on the other hand, we are seeing relatively high inflation. we do not think the bank of

england will act anytime soon. we see quite lively duration here. and will offer investors decent yields, practically in comparison to some of the other yields you can certainly get around europe but also globally. jonathan: going to wrap up the program and you know how it works. we will put you in a box in the rapid fire, which means i asked questions and you keep answers as short as possible. the first one -- would you hold greek five your debts with the surety or at&t's 41 your trench? greek five your debt or at&t's 41 year? year. at&t 41 i andrew: security and grace. at&t.arilyn: jonathan: upside of downside surprise? colin: upside. andrew: upside. marilyn: upside as well. jonathan: inflation is off and conditions are loose. should they target inflation or

should they target loser financial conditions to tighten them up? target inflation or loose financial conditions? colin: loose financial conditions. andrew: loose financial conditions. marilyn: loose financial conditions. jonathan: great to have you with me. my special thanks to colin robertson, andrew chorlton, and marilyn watson from black rock. it has been my pleasure. we will see you next friday. this has been "bloomberg real yield." you're watching bloomberg tv. ♪ these days families want to be connected 24/7.

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♪ vonnie: here are the top stories on the bloomberg and around the world we are following. three republican senators and the skinny repeal bill. mitch mcconnell said quote, time to move on. we will discuss. that comes next. uber still on the hunt for a new chief executive officer. may be onng ge ceo the short list. behind the company's search for leadership. plus, today is the day, at least .or 30 people elon musk has newest electric vehicle.