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 forces paid, -- say the, -- fade, raises questions about the fed's next move. at&t gets 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 lower 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 it is 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 may take remedial 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 it is still supportive of being in risk assets. >> there's a lot of complacency in the risk market and i wonder when the fed actually does raise rates and starts to reduce the balance sheet if the market does not have to go through some sort of readjustment process.

jonathan: joining me is colin robertson and andrew schulz and over at strode and marilyn watson. andrew i want to begin with you , with the idea that we move with price action one week to another week. things seem to change rapidly, but ultimately if you look at the fundamentals, nothing has really changed at all. you can take the inflation data of today, core pce take a month , on month inflation data as well and it's just trending lower and lower and reflation forces are fading. andrew: we will have the same conversation next week with payrolls and it built all the excitement in the morning and people will slowly forget about as the trading continues. i think you have to look at the structural factors keeping inflation somewhat suppressed in the developed world. at the same time, you have to look at 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.

you always get it 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 and lessening as each day goes by that they could attempt another move this year. jonathan: marilyn, we had a guest on a couple weeks ago who said the burden of proof is on inflation. 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 treasuries, for yields, for liquidity. we still think on balance 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 reinvestment program. maybe 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 a huge 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 -- the message to me is that the price of inflation is not cheap enough yet. we are not there 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 already know from expectations that no one is expecting a rate hike in september or in the meeting afterwards. may be a 40% chance in december. expectations are already kind of there. we think there might be some

opportunity to take it manage of -- to take 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 story? have we gone far enough to do it -- to do what 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 full 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 just focus on fundamentals, but unfortunately the central bank in there 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 -- announce in september? do you have any idea from september and beyond what the reinvestment 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 readjust. it will have an impact on quantitative tightening and credit markets over. when you look at it, it still has a huge balance sheet that will take time for it to reduce the size of that. also, when you look abroad, when you look at a globally, still on the other hand, you have the bank of japan bubbling up assets. you have the ecb buying up assets. while the federal reserve will look to reduce the size of its balance 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,

the long end,hort but when the balance sheet policies take hold, do we 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. i think it goes back to the point you made just recently it wasrade and the way 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 the movement goes to 3%. andrew: the fed wants to withdraw the balance sheet in as subtle away as possible. i agree with the other comments.

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 bubbles 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 or be 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 have completely distorted the price of risk, which isn't a good thing longer-term. jonathan: colin will be staying us along with andrew and marilyn watson from blackrock will be staying with us as well. coming up next, it's 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." ♪ ♪

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 with the treasuries $26 billion 2-year note sale that for a yield of 1.395%, the highest since 2008. the auction had a bit 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

have drawn almost three times as many orders as they were securities for sale. to wrap it up in europe, hungary investors welcoming guess what? new greek paper. greek stocks $3.5 billion of bonds in the first output in the markets in 2014. -- since 2014. the country paying 4.625% to borrow for five years. still with us to discuss risk and the prospect of complacency is colin, andrew, an marilyn -- and marilyn watson from blackrock. maryland, let's begin with the credit story. colleague lisa abramowicz is 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 view, 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 we are not necessarily being paid for the next duration or it what we prefer to look is down the stack to 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 just put up is interesting. if you look at that duration of the day, the quality has deteriorated 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 is a little bit longer. spreads continue to grind 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 from here. part of the reason for that is to what marilyn pointed out and in my opinion, is more duration than the absolute credit. that being said, where do you pick spots if you want to invest in the income market if you have to? i would pick the high-yield space. jonathan: andrew, at this point, let's take out 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 -- year path. i struggled to find an analyst that will coming what happened in the next quarter next year. try telling me what's going to happen in 41 years. with the debt pile that company has got. 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 completely

dominated by insurance companies and pension 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 in the 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. and they wanted more. jonathan: looking at the comments from howard marks of oaktree capital earlier this week in his latest memo, he was warning about complacency. he took 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. his point here, maryland, is you take the equity like investment of netflix, he's asking question

-- he's asking 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. you just wonder why is the netflix curve compared to the broader market? people get excited about the name. does that concern you? marilyn: overall we have a 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 fundamentally 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 are continuing to invest, they are 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. particularly in these companies that are driving forward growth and change in the way people do business. jonathan: that sounds like an attractive equity proposition. why is 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. but i think in terms of debt, if you like that equity, 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 among these type of 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 can that 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, 25 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. i think when you pointed 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. so 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 really worth it if the upside is 25 basis points? colin: it's worth it if it's going to last a while because your alternatives could be what you not want to invest in.

as marilyn pointed out earlier, we are certainly in an environment where there are yield hungry 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 is going to happen. by the time it happens, there will be a really 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 per se. you want the asset manager who will pick the little gems in there. it is much more about security allocation about asset classes , and it's only high-yield per se. jonathan: colin robertson alongside andrew chorlton and i'm pleased to say marilyn watson from black rock stays with us. let's wrap up the week, check on markets of where treasuries have been. yields just a little bit higher

on the front and by single basis point. by six on the 10 year and 10 on the 38 year yield. -- on the 30 year yield. still ahead on this program, the final spread, 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." ♪ ♪

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

, report just around the corner. still with us to discuss is colin robertson, andrew chorlton, and marilyn watson. marilyn, i want to begin with you. expecting from the boe 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. that being said, i think recently inflation if anything has surprised to the downside. there's a lot of uncertainty around the state of the economy going forward and economic growth in relation to brexit. so we don't think that the bank , of england is going to act anytime soon. in fact 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 of england. jonathan: i thought this was really straightforward. take a leap from the mervyn playbook -- mervyn king playbook. you except inflation spikes in the short-term and support the outlook. we are not taking a cue 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 in the next 18 to 24 months. 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. but it is not too high, we do

not think the bank of england will act anytime soon. we actually quite like the 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 year debts with or at&t's 41 year trench? colin: at&t 41 year. andrew: security and grace. marilyn: at&t. jonathan: really interesting. upside or downside surprise? colin: upside. andrew: upside. marilyn: upside as well. jonathan: for the federal reserve, inflation is soft and

conditions are loose. should they target inflation or should they target loser -- looser 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. thank you very much. my special thanks to colin robertson, andrew chorlton, and marilyn watson from black rock. it has been my pleasure. that does it from new york city. we hope to see you next friday at 12:00 p.m. new york time. this has been "bloomberg real yield." you're watching bloomberg tv. ♪ ♪

>> it has been nearly six years since tim cook took over for apple's iconic cofounder steve jobs and each year, the company becomes more of his own. he has unveiled the apple watch and apple music. he pulled off the largest in apple history. he's taken on issues like the environment, philanthropy, equality, and education. he stood up to president obama on user privacy and maintains a dialogue with president trump, despite their disagreement on climate change. now, as iphone sales plateau, questions remain