>> from new york city and to our viewers worldwide, i'm jonathan ferro. 30 minutes dedicated to real fixed income. this is bloomberg "real yield." ♪ jonathan: the world's biggest central bankers gather in jackson hole and they hear from mario draghi. janet yellen offers a broad view of the rules and they look at the height of concerns over the u.s. debt ceiling. we begin with a big issue in jackson hole, less about yellen and maybe more about draghi. >> i'll be paying more attention to mario draghi. >> investors should be paying

more attention to draghi, not yellen. >> he was walking on eggshells. >> everything to gain is so dependent. -- so data dependent. obviously if the euro zone was to show any signs of rolling over, core inflation drifts back down. it may be very difficult for them to announce anything at all but certainly the market is looking for some clarity. >> the central bankers want to be very gradual, very careful in both signaling and implementing the withdrawal of this extraordinary accommodation they put in place the last few years. >> how do you exit in a careful way where you don't signal too much you're exiting and still give time for the economies to do well and still give time for the inflation to come up and i think he will at jackson hole go carefully forward. >> the economy there is more fragile than the u.s. from a structural perspective, so i think the draghi comments will have much more information content at this stage. >> the ecb wants to always say, we're always going to say nothing and leave our options open, but the market will hear what it wants to hear.

and it's kind of backing off a little bit on the idea that he's going to say something. but it could always interpt what he says in a more hawkish tune. we'll have to wait and see what he says. jonathan: let's get out to jackson hole, wyoming and bring in alessandra. great to have you with us. what are the questions we're looking for answers to, when we get the speech from mario draghi? >> well, what everyone would want to hear from draghi is some clarity about how the e.c.b. will continue in the -- will continue or exit in the course of 2018 from its unconventional monetary policy, most notably large asset purchases. but this is most likely not going to happen. the e.c.b. council will meet in september and most likely draghi won't want to front up the discussion governors will have that the that time.

jonathan: hasn't stopped him before, he boxed in the governing council before. he did this three years ago at jackson hole, why is the time different and why is the topic so much more sensetive about removing accommodation? alessandro: very simple. the at the time in 2014, draghi felt he probably needed to jolt the council into action in what was a rapidly changing, almost emergency situation where they were slowly sliding towards deflation. right now, the euro economy is doing well and growth has been surprising on the upside. there's not so much inflation but at least there are signs it might be picking up in the next few years. there's no need to rush or jolt the governing council into action. jonathan: he'll get a nice break in beautiful jackson hole. from jackson hole, wyoming. i want to bring in the roundtable for the next 25 minutes. with me in new york is marvin hagerty of black rock and ira, u.s. strategist and coming to us from atlanta, matt holmes, c.i.o. at fixed income. ira, let's begin with you.

the theme is fostering a dynamic global economy. it's not really the sensing for -- the setting for an e.c.b. or san antonio be the setting for a e.c.b. president to intervene in the currency market and do anything spectacular along those lines. ira: i think what mario draghi wants to do is play with the themes that have been talked about this conference wants to focus on, things like regulation and are there things the central banks can do to stimulate the economy? janet yellen took a little bit of a step back though she was pretty pro regulation, she also said hey, there are tweaks that probably can be done because of the interrelationships of all of these different regulations might actually be hampering growth and maybe we should look into that and i think mario draghi might come from the same type of approach. jonathan: martin, for investors, how have you been prepared for the removal of accommodation in europe when central bank activity has been so big the last few years and you've seen what happens to markets in your, tighter spreads and creditors driven higher and yield

compressed. how have you prepared for the removal of that stuff? martin: that's a great question and wouldn't say it's specific to europe. i think it should be applied globally where you have the fed with the balance sheet and the b.o.j. continuing to manipulate rates between plus 10 and minus 10 in the 10-year space and the impact it's had globally by taking yield and duration out of the market is catastrophic where you had this grab for yield where the lack of availability of assets in europe has bled into demand for u.s. assets and the same can be said for japan leading to global demand. the way to prepare for it is obviously we hang on every word the central bankers say and they've been manipulating rates and currency markets via interest rates the last few years. and they learned to lessen during the temper tantrum you have to approach this incredibly carefully. jonathan: europe is so different and matt, europe is different in the sense they've been buying corporate bonds as well and i put up the chart on the

bloomberg and you can see, both high yield and investment grade and the spreads are so tight, matt, what's going to happen when the e.c.b. try to step back to that chart? matt: ultimately there is a head wind coming, but we think it will be some time away. we don't think 9:00 german time tonight is the right time for draghi to start the method of -- the messaging of tapering particularly for the currency , markets which will still be quite liquid in u.s. time. ultimately the headwinds will spread, but we think it's more of a mid 2018 story and not 2017 story. jonathan: we talked of the federal reserve winding down qe. the yield are lower now on 10-year treasury than running qe $80 billion a month. i asked, could we have the same situation, because pretty much every conversation around the e.c.b. is based around yield have to go high when they pull back, but could we have a similar situation in europe that ultimately we have here in the united states?

ira: not so much when they taper or when taper is announced. we know once they announce taper, the markets will reprice and say they're not buying quite as many bonds and the markets will ask a secondary question and now that yield are somewhat higher, what's the path of inflation and growth? and if that's stable, maybe rates stabilize there, but if people say well, maybe this is a mistake, they're going to unwind too fast, that will wind up making longer term rates in particular come down. you wind up seeing linkers, for example, wind up showing break evens coming in quite substantially in that area. we spent -- jonathan: we spent so much time focusing on flow as investors look at the rate of qe, but the balance sheet is massive. how important is that balance sheet and how powerful will it be in years to come over the e.c.b.? matt: we think all balance sheets will shrink slowly. the fed put out a very slow pace of a trillion dollars over three years' decline. the e.c.b. will likely follow pace when they eventually

announce this. it will take by all measures it looks like multiple years, five or 10 years, to get the balance sheet lower and there's an echo fear of the taper tantrum and central banks are afraid to do anything quickly and actually we'd say they're missing too slowly, and the surprise in 2018 may be the increasing pace of the fed potentially under a new -- pace of the fed potentially under a new leader that ultimately eventually an acceleration of any policy ultimately announced by the e.c.b. jonathan: we'll get to the federal reserve conversation in a moment, but just comparing the experience of the balance sheet and the path of balance sheet and the power of the balance sheet at e.c.b. and the flow versus debate, where do you stand, ira? ira: flow matters significantly more when flow is what's driving prices and that's what's driving prices right now. the stock effect has a much longer term kind of balancing effect where you say ok, should yields be 2% or 4%, that winds up being a different scenario. you know, one of the things i'd like to say about any balance

sheet is what the e.c.b. is doing is significantly different than what the fed did because the federal reserve for most of qe didn't buy significantly risky assets like the e.c.b. is doing. the e.c.b. is buying corporates like that chart and really compressing corporate yields and spreads and that dynamic can change a lot and happened in the u.s., too, which i'm sure we'll get to. jonathan: the removal of the accommodation and the federal reserve is a plan of how to go from x to zero in a period of time determined by the federal reserve. the e.c.b., the next plan for qe, will it be like that, will it be this is how we get to zero or is it the case of this is us going from 60 to 40 and this is how long we'll do it for and revisit it x amount of time? martin: i think the latter option is how they are going to proceed. as things currently stand, the current program, they'll start running into technical difficulties in the first half of 2018 with respect to issue ownership, ownership of bonds relative to outstanding.

i do think what they'll do is put up short-term goals they'll try and get to. there's some political risk again on the horizon starting with italy. which i do think the e.c.b. would still like to be engaged in a q.e. program as we approach -- in a qe program as we approach some sort of italian election in 2018. jonathan: martin haggerty sticking with us with ira yersy and matt toms. coming up, fed chair janet yellen has apparently made her final speech from jackson hole. we will get into that in just a moment. you're watching bloomberg "real yield." ♪

♪ jonathan: jonathan ferro from new york. this is bloomberg "real yield." federal reserve chair janet yellen said any rollback will be quote, modest. potentially putting her at odds with the trump administration. still with us, martin haggerty from black rock and matt thomas from voice and i write years he -- ira yersey. martin, why don't we get a bid and we put the emphasis on the bid after the speech from the treasury market? martin: the bar for yellen's speech was really low and very little expected to come out of it and she definitely did not disappoint. where there was potentially some small hope she may bring in the current level of financial conditions and how that may play

into monetary policy, but she barely brushed on the topic and talked predominantly about regulation as you referred to, and we had a couple basis point rally and a couple basis points lower and the dollar is weaker. jonathan: let's talk about the financial condition story and the tension between loose retention and elevated market pricing and that between ultimately soft inflation after soft inflation after soft inflation. how is the fed meant to calibrate monetary policy for those two things? matt: we think the fed will increasingly bifurcate those two things and inflation will be drawn into the rate-setting debate and the balance sheet size is more likely to be drawn into the financial conditions debate and also the bubbling fed statements about asset values. ultimately, the balance sheet is likely to be the topic of conversation on the front burner going forward and ultimately with the potential new fed

chairman after yellen's pretty open disagreement with the administration policy on regulation and we have to anticipate a new chairman will move towards a balance sheet. jonathan: was that the nail in the coffin, the idea the fed chair is standing up for the current regulatory system, the structures, and this is ultimately whether she's a low rates person or not this is ultimately what this administration wants, deregulation. matt: it seems like the delivery of the two week notice in corporate terms, and it seems that it's clearly at odds and we would expect this is the beginning of what we'll hear about the change to ultimately likely cohn. jonathan: did she sign a resignation letter? ira: i agree with that assessment. there wasn't a high potential she would come back or say yes if she would agree to it. someone might look, though it's not gary cone but somebody who looks like him, probably a monetary policy dove and also anti-regulation.

i think that is the type of person that the trump administration is likely to appoint. jonathan: whether it's gary cohn or not, an interview with the financial times is they're hopeful of getting tax reform done the end of the year and you add the deregulatory story on to that as well, is that going to be a stimulus to the economy? the hope coming in the year was yield would go high and everything would be great and we'd finally get that inflation. break evens rolled over and yields are 220 on a 10-year. when is that going to change, martin? martin: you guys have referred to the current run rate of inflation which took a meaningful dip the last five months and some of it is legitimate and some of it is statistical noise in certain components. when we look at the legitimate components, where it is that low slash disinflation coming from? it's not coming from areas that are disadvantage to consumers. -- consumers. we're getting discounting in apparel as we have the internet effect. you've had a significant reduction in wireless and telecommunication plans, which

are not a sign of lack of demand. they're all a sign of sort of recalibration of supply delivery techniques and that's definitely a pickup in real disposable income. ira: it is like the productivity boom ends up being lower prices. jonathan: add on whole foods? ira: not worker productivity but corporate productivity and you can have lower prices. what does it mean for financial conditions? they can remain very accommodative even with the fed starting to hike because you basically have a productivity miracle that's not showing up in traditional productivity measures. jonathan: matt toms, you saw the picture, the video of the walk between yellen, draghi and kuroda. when you look at the inflation picture in the individual regions, it's not terrific in japan, that's for sure. the inflation picture in the united states rolling over to -- and the eurozone rolling over to some extent, and i just wonder, when we have a

conversation on wall street, that chart is seen as a bad thing. if you showed that to anyone and explained it to someone on main street they'd say that's ok, i want lower prices. why is that chart viewed over at the federal reserve, the e.c.b. and the bank of japan as a bad thing? why ultimately is that a bad thing? matt: it's ultimately the fear of debt deflation that's a hangover from the financial crisis and to be avoided. ultimately we'd say there was a very big difference between the lack of upside in inflation and the fear of downside. the market doesn't in our opinion fear debt deflation at this point, but the central bankers are acting as if they do. moderate inflation, 1 1/2 to 2% -- one and a half percent to 2% is not to be feared and paints a very constructive outlook for growth and financial conditions not needing to be addressed too aggressively on the rate policy setting front. jonathan: matt toms, martin hegarty and ira jersey, stick with us. i want a check on where bonds have food -- have been, this week. two 10's and 30's in the treasury market. yields throughout the week

grinding higher on the front end by two basis points, rolling over on 10's and 30's by the same amount, two basis points. a flatter curve. the treasury down two bases points, 217 on the week. still ahead, the final spread. the week ahead featuring brexit talks and the u.s. jobs report. next week, september already. this is bloomberg "real yield." ♪

♪ jonathan: i'm jonathan ferro and this is bloomberg "real yield." time for the final spread. coming up over the next week, we'll get another round of brexit and nafta talks. u.k. prime minister teresa may will visit japan and we'll get a series of u.s. economic reports that will include inflation, autos, and its payroll friday already, believe it or not. the president of the united states will also be making a public push for overhauling taxes. still with us is martin hegarty from black rock and matt toms and ira jersey.

something we have to talk about is what is happening in d.c. matt toms, we have a debate over the debt ceiling and this debate over the deficit and what's going to happen with the budget going forward and tax reform etc., a government shutdown. the only tension we've seen so far is in the treasury build curve and i wonder if it can bleed out from there and go elsewhere. what are your thoughts? matt: we don't think it will bleed out and we think a shutdown would be political suicide, and if it were to happen would be extremely short lived and don't think anybody gains from that. and ultimately, this is likely to be noise but ultimately you need to move to this tax debate and the difference between reform and tax cuts are meaningful. we think it will be impacting the market very differently. we're anxious to move beyond the debt ceiling and get to the real debate on taxes. jonathan: ira? ira: i can't wait until we're done with the debt ceiling but unfortunately it is just coming. we haven't heard the noise around it.

we've been talking about it a little bit, here and there in bloomberg intelligence and markets. but you look at the news flow and if you look at what i have up on the bloomberg terminal, you look at the news flow and how many mentions the debt limit has in the past versus credit the default swap spreads in the u.s. and we're in the first inning here of talking about the debt ceiling. usually it's about two or three weeks before kind of that end date which i currently have at october 3 on my model is when we're going to start to see this. right around september 15, right around the time you get these corporate taxes that come in. everyone will nail down some date the government will default if they don't raise the debt ceiling, and unfortunately i agree that i wish it would just go away. jonathan: but it won't. ira: and we can talk about real things like tax reform or the budget in general. jonathan: ultimately, martin, it won't go away, but does it matter, and we've been conditioned and investors have been conditioned to say it ultimately doesn't and you get through it and move on? is it another episode in the sense it doesn't matter and

we'll move on? martin: there's a couple things. one year you have a english person asking about his involvement in american politics. jonathan: our political situation just as messy. martin: i do think it matters. and you mentioned that it's finding its way to the front end of the bell curve. i would argue it's finding its way into the fixed income yields as a whole as there have been the flat equality and discourse in d.c. becomes a bit more negative. so it's happening. it's going to continue to be important. that being said, i do think it will be resolved but not without a significant amount of uptick in the headlines going into it. jonathan: what we have seen is a flatter quality not just in fixed income in terms of sovereigns, but credit as well. is it another reason to accelerate that move into higher quality securities, into high quality assets? matt: we think it's the current symptom, the ultimate -- the

bigger issue is the dysfunction in washington. so continued dysfunction in washington beyond the debt ceiling and into tax reform or health care and the like is starting to weigh on the market, i would agree it has an impact on the dollar and risk taking. it's the bigger issue not just the debt ceiling. when that goes away the markets will quickly focus on can anything actually get done and , increasingly as people say no there's a bit of disappointment and a rolling back of the growth outlook unfortunately. jonathan: we'll wrap up the program the way we usually do it, wrapping up the last 30 minutes in trying to look ahead with rapid fire questions. the first one, one word answers, please. did yellen just kill the chance of a second term, yes or no, martin? martin: no. ira: yes. matt: absolutely. jonathan: buy and hold 10-year treasuries or bunds to year end? martin: i would take treasuries. ira: treasuries. matt: i take bunds. jonathan: payroll, a surprise,

it's a guessing game? martin: upside. ira: downside. matt: upside. jonathan: great to have you with us on the program. thank you all. we will see you next friday. this is bloomberg "real yield." ♪

♪ julie: coming up on "bloomberg best," the stories that shaped the week in business around the world. president trump gives investors plenty to think about. pres. trump: our support is not a blank check. >> i don't think this is going to have a big effect on financial markets. julie: and perhaps to worry about. pres. trump: believe me, if we have to close down our government, we are building that wall. >> plenty of investors are are worried that maybe president trump has termed the way things are going. julie: a big deal rocked the energy sector. warren buffett sees a big deal fall apart. samsung's new phone gets a good deal of attention, and carl ic