♪ scarlet: i'm scarlet fu. l: i michael mckee. jonathan ferro is off today. let: for 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ gundlach saying the time to reduce risk is now. and he u.s. inflation numbers for fed chair janet yellen to chew on. where does that leave the central bank now? we start with a big issue. nerves gripping the market.

>> the reach for yield is apparent in every asset class. >> we know the insatiable chase for yield continues. >> we should be watching for excesses or buoyancy to get to a tipping point. >> it should not surprise that this thirst for yield has gotten into the high-yield market stree. am i being compensated for the risk i'm taking on? >> you have to be buying credit somewhere whether it's high-yield or high-quality corporate in an effort to get some spread over that which they can earn in treasuries. as a consequence, you have a sort of natural buyer for it even if they have to hold their nose for it while they're doing it. >> there comes a point in most investment cycles where you have to start thinking the return on capital is rather less important than the return of capital. keeping your money and not losing anything becomes more important. >> a lot of folks who are big

names and got it right the giving of the rally are beginning to say, look, this can't go on forever. scarlet: one of those big names gundlach. he said, "if you're waiting for the catalyst to sell itself, you're going to be selling at a lower price. this is not the time. d where you say i can buy anything not worry about the risk of it. the time to do that was 18 months ago." michael: joining us now is a great bishop and coming to us from st. louis's brian reeling. is at the wells fargo investment institute. i want to start with a chart that basically shows what jeff gundlach is talking about. the yellow line will show the ration. duration is really high and

spreads compressing. if the terror we heard in all those people's voices, is that justified by the sort of thing? is jeff gundlach right to start pulling back? rachel: we don't disagree. we think it is time to take risk down. we are goldman sachs asse asset management have been taking it down for the several months. we are under waiting assets, but it's new wants. we do not worry perfectly about the current fundamentals of the market. it is pretty high but not increasing. they has that the last two years extending the maturity profile at very low cost of that. we see a very low default rate and we do not expected to pick up soon. the real question is are you being adequately compensated for the volatility and illiquidity in the market? iodthink we are facing a per

where volatility could be higher. high-yield tends to underperform and we see triggers for volatility to go up. scarlet: maybe it's for that reason that you have been underweight high-yield. how long have you been underweight high-yield? how much performance have you had to give up as a result? brian: when we look at a total portfolio basis, we have been underweight high-yield since earlier this year, favoring equities for the risk-based asset. i agree with what everyone else has said. high-yield looks expensive. when everybody thinks the same thing, sometimes the opposite happens. freight easily if everything goes as planned and inflation yous low, gdp improves, could continue to clip coupons in the market. i don't think living coupons is th worth the risk you are taking. scarlet: what is your next move going to be? is it going to be read building high-yield? -- rebuilding high-yield?

this is nothing on the broader scale. if we saw more pullback, we would go back to an even what position. michael: what are people worried about? when you are looking at duration coming to looking at sensitivity to great moves. what moves at this point? >> it's more of a question as to what are investors not watching and concerned about. they're so much noise in the market right now. with regards to investor concerns, they kind of get back to comments that have been made. getting adequately compensated for the risks i'm taking on. ? in many cases, the move to and decision to move into high-yield is throwing money blindly. tone toour cautioned investors is really focusing on what you are investing in.

do you know what you are buying? do you know what your position is in high-yield? we have looked at so many portfolios recently that over the last for years have chased the yield in high-yield for example. investors often don't know what their exposure is. it is time to focus on what you own. time to do risk actually. michael: just because of the length of the expansion at this point? there's always the geopolitical risk out there that we cannot quantify. when you're talking about the normal sources of risks like central banks, they are going out of their way to say that we are not going to move the markets. we are going to be very slow and very deliver. craig: and we believe that. we believe certainly what the fed is telling us. our view is that you need to listen to the fed because i think despite concerns about whether or not the fed is going to move in december based upon inflation come i think our view is that they will. they are talking about this gradual path, so clearly to us the expansion that we have seen and are currently in has legs to

go. we see no recession on the horizon. it is two years down the road at the earliest in our book. in the equity markets, there is volatility and we expect a correction there. equities and high-yield pretty much moved hand in hand. i think there is room to run in high-yield, but it's time to be cautious awful. also. rachel: we don't disagree that there's still time left in the cycle, but we do believe the fed will hike at least once this year and a couple times in the next 12 months. we are on the brink of what we would turn quantitative exit. when we see the fed intending to shrink its balance sheet, at the end of september is our greater bet. that will begin to have a technical impact on the market. in particular, we have seen very suppressed volatility for the last couple of years. we think volatility will pick up. high yields correlate highly with volatility. scarlet: she brought her own chart!

g #btv 7336. rachel: it shows a correlation between volatility in high-yield spreads. volatility has picked up a bit and spencer already 40 basis points wider. there is a valuation question. people are concerned about high-yield when it was very tight. it is cheapening up now and there may be a moment to own it again, but it's a cautious period. gotten: one that has attention is showing how the european high-yield spread has gone down. the blue line is the 10 year yield. in 2003 come the european high-yield spread came in below the 10 year yield. you can see it stayed that way for about four years. it took four years for that to change. it ended in late 2007. now if you go to the far right of the chart, we are on the cusp of the european high spread coming in below the 10 year yield again. michael: what is that telling us, rachel? rachel: among other things it's

an expectation that in europe that rates are going to lag the u.s. we will see a much lower path of quantitative exit in europe. also in europe, you have in the high-yield market higher quality market. it is more of a double d market than a single the market. it does not have the energy exposure that has added volatility to u.s. high-yield quite recently. as a shorter duration market. it's only a three year market. it is keying off very different things from the u.s. treasury's. scarlet: brian, what does that mean for you? you look at global fixed income securities. what do all the warnings about this credit cycle mean for europe? brian: we have seen really strong gains as spreads of titans, but i think spreads can continue to stay relatively low. we are even wait overseas and the emerging markets -- weight in the emerging markets. are you being compensated for the risks your taking?

its at best a wash. it's not worth putting a lot of chips on the table. they are lagging the u.s. recovery so rate should stay relatively low. scarlet: everyone stick with us. craig golder, pregnan bishop, and brian rehling joining us from st. louis. coming up, the auction block. esla sale of $1.5 billion dollars in bonds is testing the market. we will go over all of it. this is "bloomberg real yield." ♪

♪ scarlet: i am scarlet fu. from new york, this is "bloomberg real yield." let's take you now to the auction block. there was $62 billion in treasury auctions this week.

you had the sale a three-year, 10 year, and 30 year debt and a 30 year sale. and direct it is took the highest share on record, while in the three-year, p the lower share in 14 years. on the corporate side, tobacco selling billions in bonds, ranking second in the biggest offerings. it will refinance the buyout of reynolds american. the debt sale that has everyone talking -- tesla. the inaugural junk bond issue price at about 5%. to 1.5 billion sale of senior notes best the $1.5 billion sale of senior notes as it ramps up production of model three. michael: we're back with rachel golder, craig bishop, and brian rehling from the wells fargo investment institute. since we are talking about high-yield, rachel, let me start with you. i know you cannot talk about the company itself and the bond sale

that the just want to market with, but in general, does this reflect a strength of the market or weakness of the market now? are we seeing companies take avenge of yields why they still can -- while they still can or is there just so much cash that anybody can bring anything to market and meantime? anytime? we wille wilrachel: certainly acknowledge that they got out in the market early and they're using that money to move build the capacity for that car. that's pretty adventure like in terms of proceeds. i would not call it characteristic. we have had those two very large investment grade issues in the last couple of weeks. thbut actually the backlog of deals is quite light. m&a is running below the pace of 2016 and 2015. in terms of the tesla financing, the thing that jumps out at us is that covenants are pretty

challenging. we are not getting the same sort of protections that we did 15 years ago, but that has been a persistent trend over the post financial crisis period. michael: is that basically what you are seeing as well? people are putting more protection into their contracts? brian: i would just say in general that the demand for debt out there is based on. out there ishat -- very strong. i don't see that fading. there were debt deals that were ove at times oversubscribed. i think that trend continues not just over the short term but over the long term. there are some structural issues in the u.s. and around the globe that will persist that will drive demand for debt and duration. onrlet: craig, to pick up that point, there have been a lot of large issuances. how is the market been able to absorb all this without so much of a blank? craig: it is a sellers market.

they can come to market with a couple of light deals and the demand remains strong. global markets are just awash in liquidity. there is good money that wants to be put to work. the reach for yield is still out there despite warnings from gundlach, how it works, etc. about the concerns right now. it's a matter of global liquidity and demand remaining strong. rachel: of the like to add that technicals are pretty strong in the market. we have seen record new issuance in the market you today, but in bank loans and high-yield scum of the use of proceeds has largely been used for refinancing, pushing maturities out to the future. we have not seen the resurgence of the lbo been that we saw brett beforehand. the aggressiveness of issuance is not that exceptional. until this year, triple c issuance was actually quite light. there's some triple c, but it's

mostly refinancing. scarlet: i know you are looking ies in thetc picture and so far, things do not look so terrible from that perspective. rachel: it is only the last pope month chart for the trend of bankruptcies. we were ending with the energy recession and despite 4% across the market. they are now low 2%, well below historical averages. energy dominates the largest liability stacks of bankruptcy in the last year, but you have a couple of consumer products companies in there as well like palis and gymboree. that's an area of focusing concern, but a much smaller part of the market. michael: when you look ahead to 2018, do you worry about what we are going to see in terms of default rates? does that change the way you look at things? we started the show with people worried about things are now. are you anticipating any type of spike? craig: we aren't.

it goes back to the current model environment. it goes back to the story about the markets have room to run yet. i think as long as we continue to see this slow and steady growth coming not see the big pickup in the fault or bankruptcies. high-yield equity markets are going to be supportive, but it's going to continue in our view to drive spreads a little bit higher. scarlet: talk about the influence we have seen the summer. how has the amount of new money being put to work changed over the past two or three months? brian: i just think you continue to see investors once you get into the market. we are starting for the first time in a long time, at least in the retail investor space, starting to see investors move out of cash. we have had large cash balances. we are starting to see them investment so much in the fixed income market, but more and equity markets. is not a sign a froth

iness yet, but little bit of a change the last six years. bishop, rachel golder, and brian rehling from st. louis. let's get a quick check of bond markets. you can see the yields are all coming down. the yield right now. the week ahead features the minutes from last fomc. all that coming up. this is "bloomberg real yield." ♪

scarlet: i'm scarlet fu. this is "bloomberg real yield." time now for the final spread. coming up over the next week, you have yes retail sales, nafta discussions, and minutes

from the fomc. are getting ever closer to the jackson hole meeting as well. michael: we were talking about whether assets were overvalued at all. the federal reserve of minneapolis bank president speaking now and he says no asset class is flashing red to him. doingnything the fed worrying you? craig: not at all. we have been comfortable and confident with the steps the fed has taken to rescue from the rate recession as well as managing recovery going forward. at the upcoming fomc meeting with regard to the balance sheet, we don't see a repeat of the taper tantrum. we see a fed rate hike coming in december. michael: speak and tantrums come i want to bring up a chart and take you to the short end of the market. #btv 8582. this is the spread between one month and three-month builds. the last 10 times we had a debt

ceiling problem, we saw spike below zero for that spread. we are not quite there yet over on the right hand side, but you can see us moving down. let's start with brian. are you concerned that we are going to have something happen in the debt ceiling debate that will cause the markets to react significantly? brian: know, i think the debt ceiling plays out as it has most of the other times. ando to the last minute they will eventually pass. they will cause some market concerns in the near term, but eventually it will pass and play out. they don't have any other choice than to pass it. michael: is that too much complacency? rachel: i am not sure i would call complacent when you think it will be brakemen ship up until the last minute. we expect volatility to pick up them, but everybody since is the underlying importance of clearing the debt ceiling so it will happen, but it will be last-minute and a flurry of

volatility beforehand. scarlet: what will volatility look like this time around versus the last debt ceiling debate? craig: i think given the uncertainty as to policy coming out of washington right now and who is leading the way there, i think that will create the volatility. we went to the t-bill market. from latek at them september and early october, he pick up 10 basis points already. there's some concern already playing out in that market. we think of debt ceiling will be passed supposedly. ryan, mcconnell, and the white house are on board wanting to get a clean bill passed. in uptick in volatility should be modest. michael: you could also have the said starting its balance sheet reduction at the same time. . does that worry youu that you have these two competing elements? brian: i'm not worried about the balance sheet reduction. it will be very minimal. 1 -- it has been well telegraphed.

number 2 -- if you look at the schedule, they have over $200 billion of extra year.ty securities next they will be buying more bonds next year than this year even though they start reducing the balance sheet, so very little worried there. scarlet: doesn't that seem concerning that no one is worried about the balance sheet reduction? just from a contrarian point of your, wouldn't that be reason to worry? craig: i think that's a good point and you're right to play the contrarian here. what is different from say 2013 and the taper tantrum is that the fed over the last few months has been so careful and cautious in kind of explaining what they want to do. i think that has helped to pave the way for the reduction in volatility. scarlet: is now time to get to a rapidfire questions, where you just have to give a one-word answer to our questions. first question here to rachel -- what will be be talking about and five years time, quantitative easing or

quantitative exit? rachel: in five years time, we will probably d be back on the easing side of it. craig: five years from now, we will be talk about interest rates lower for longer. little change from current levels. using or exit?our a craig: exit. brian: exit. michael: where's the terminal rate? rachel: closer to 4%. craig: closer to 2%. brian: closer to 2.5%. scarlet: thank you to rachel golder, craig bishop, and brian rehling. this is bloomberg. ♪ ♪

track your pack. set a curfew, or two. make dinner-time device free. [ music stops ] [ music plays again ] a smarter way to wifi is awesome. introducing xfinity xfi. amazing speed, coverage and control.

change the way you wifi. xfinity. the future of awesome. vonnie: it is 12:30 p.m. in new and and 5:30 p.m. in london 12:30 a.m. in hong kong. i am vonnie quinn. welcome to "bloomberg markets."

♪ from bloomberg world headquarters in new york, here are the top stories on the bloomberg and around the world we are following. locked and loaded -- stocks are higher despite president trump taking aim at kim jong un rhetorically once again, warning that the u.s. is ready for military response to any attack. why wall street is tuning out the latest rhetoric. snap, crackle, and drop. shares of the photo at maker plunging as user growth stalls. can any users save it from social media threats? more concern for the u.s. economy and the latest read on the u.s. inflation came in light of expectations. can janet yellen and the fed stay on its tightening course? let's start with a quick check on the markets now. we were looking earlier at the equity indices higher and