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president draghi urges patience as the economy continues to outperform. >> it is hard to talk down your currency when fundamentals are improving. >> the currency has been a headwind, but we believe we are justified by the domestic strength of the economy. >> the reason they are not too concerned by the euro is it seems to be an endogenous -- exogenous shock. it is a manifestation of the confidence of the eurozone and their policy. >> the eurozone is now growing as much as the united states. and so, i don't know if you change monetary policy if it affects that much. i think the euro is correcting for a changing growth rates that is now reestablished in the eurozone. rope betweenht announcing a tapering decision ahead of the governing council, he really didn't have a lot of leverage with his words.

is then: joining me here global head of bonds and chief at pgimnt strategist limited, also eric stein from eaton vance, and trey parker at highland capital management. gents, great to have you on the program. here is what jumps out to me, the last couple of months, the message that seems to be received by the fx and bonds in europe and the divergence between the two. we can throw up a chart. burns versus euro-dollar. my first question goes to you. why can we have a bond market throwing yields going lower and the euro ever stronger? robert: if you look back over the last five years, the money was first leaving the eurozone with a crisis. after that, they moved on to a new mode of stimulus. they broke any link to the idea that this was a bundesbank, central-bank motif, they would qe, now they are

massively into qe and groundbreaking in terms of a central bank going negative on interest rates. they are chasing money out. as if that was not enough, they have moved on to political fragmentation, populism, concerns about the netherlands and austria, the greek package and balance, concerns in italy, and the le pen situation. so now, if you fast-forward, you are past the dutch, the austrian, the french outcome was phenomenal as far as europe is concerned. italy is kind of the only outlier there. the money is not coming back. europe is a place where the underlying fundamentals of being a savings block, sort of like japan which had an ironically strong currency is there. now they now have a cyclical upswing going on. the politics are coming together. and unless you have steady outflows on the portfolio side, this is going to be a strong currency. jonathan: that all makes sense except bund yields on -60 basis

points, what you want to your -- why do you want to your notes out of germany when you can have a structural reallocation to europe? >> there is still some fear premium in german bills, there are also issues with the ecb buying bunds. there are not that many of them. jonathan: if i truly believe the ecb is going to step back, why two-year note yield in germany higher? >> the question is, when are they going to get the deposit rate increase and i think mario draghi really has to tight rope monetary policy. he does not want -- he has to slowly normalize and bring down the pace of quantitative easing. i think that is a big reason. also, just look at global yields. global yields have been falling. now bund yields are going to fall as well. the way we have always looked at -- at eatondvance vance is one versus the other. the dollar has been weak this year. this is the inverse of dollar weakness in addition to the positives we mentioned in your.

-- on europe. robert: the other thing on burns bunds is there is no supply. the fixed supply is a small market to begin with. the ecb is buying based on their k. which means a quarter of their -- capital key. a quarter of their purchases every month are getting squeezed into the bond market. that market is under pressure. jonathan: trey parker, after hearing from president mario draghi of the ecb yesterday, what is the base case for you now on the recalibration of policy later this year if it gets announced? trey: i think mario is still trying to walk a tightrope in terms of waiting and seeing the data. i don't think he is too concerned right now about the euro strength. on a trade weighted basis, it is only up 6% this year, and they can handle that given the growth

outlook they are seeing across the eurozone. we think the fed and ecb are in wait-and-see modes given policy action later this year, and understanding they want more ammunition as we get later in the credit cycle. jonathan: will this be a move from 60 to 40 over six months, or 60 to 20 over nine months? the base case in terms of what they will announce, where are we? trey: i think they will start moderate. i think this is too big an experiment to be aggressive with reduction in the tapering. so just like the fed, they will guide with moderation initially and see how that goes. how well that is absorbed into markets relative to rates and potentially they will increase it later in 2018. jonathan: we have talked on this program about obsessing over the sharp nearness to the boat. that is obsessing over what the ecb does next. what happens in d.c. about a mile away is european -- an italian election possibly. does european politics reassert itself into the bond markets and

financial conditions? eric: i think it does. there have been a lot of talk -- positives with the german election, there has been a tail geopolitical risk in europe. italy isn't really growing. a stronger euro does not help italy. there's a lot of debt and -- because of -- in contained spreads because of ecb purchases. the debt trajectory is sustainable now. but if markets normalize, it really is not. that would be an issue in europe. just like markets over concerned with populism last year, markets might be getting overly optimistic this year. robert: it is a little, look at -- complicated that if you look at it between the u.s. and europe, when they created the euro out of nothing, they created the tremendous fiscal process that they immediately violated. what has happened with the fight

-- financial crisis and euro crisis is they have really regrouped. at first they wanted to drive the private sector involvement, and that was obviously a disaster. instead they tightened the fiscal restraints and the approval process. they began to make examples out of individual countries when the eurozone was acting in a position of strength. a key example is cyprus where basically, they restructured the banking sector and took money out of deposits to right the situation. how does this matter for italy? italy now -- if europe was in disarray and to have italy on the brink, that would be an -- they are a little owned by what is going on there. right now, the rest of europe is doing great and italy is the odd man out. now europe is put together and

italy is in disarray. i think they will make their way through, although it is not a great-looking situation. jonathan: think about how tight things are right now. earlier this week blankfein came out and said he worries when corporate bond yields trade below dividend yields, take the -- if you look at the dividend onld on the stoxx 600 high-yield europe, is that a cause for concern? eric: thinking broadly about global central banks, why are they tightening? his inflation out of control? no. it is financial stability. in spread.rothiness whether it is u.s. high-yield or european high-yield, whatever credit market, they are getting compressed, and explicit goal over the past 10 years since the financial crisis, but sometimes there is too much of a good thing. that is the number one focus of central banks, financial stability. financial market frothiness. jonathan: trade something that does not come up much at the ecb news conference.

should it? how frothy european credit looks? trey: i think the ecb's so mandate is price stability. from a u.s. perspective, asset bubbles and relative excesses in the system. one of the things rates and run provide is an ability to curb those excesses. they have to worry about trading false demand in asset prices, -- elevation of asset prices. that is something we need to think about as investors even though the ecb may not be talking about it. jonathan: you are sticking with us. robert tipp, eric stein, and trey parker. coming up, the auction block the day after the u.s. labor day holiday. was one of the busiest so far for corporate bond offerings. this is bloomberg real yield. ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg: real yield." i want to head to the auction block now. before the debt ceiling deadline was pushed back to december, we a nervous market ahead of some bill auctions. look at this past tuesday's full week treasury auction. the highest rates since december -- 2008. september $20 billion in bills sold at 1.3%. we are going to get into that in just a moment. august is over. blue-chip u.s. and european companies lined up to sell. one of those was apple. they sold $5 billion in four parts. the longest portion of the south, a 30-year security with the yield of 1.4 percentage points above treasuries.

and despite warnings from disney and comcast, investors still buying media debt in a big way. they sold $6.3 billion. the longest portion, $1.25 billion bonds maturing in 24/7. joining us robert tipp, eric stein, and trey parker. gents, i want to begin with eric and talk about the four-week treasury bill this week. why 1.3%? why higher than the debt ceiling experiences we have had previously? eric: i honestly don't have a perfect answer for you, but it is one of the issues with the debt ceiling. i think we need more responsible government in washington, but the debt ceiling is a crazy way to deal with it. it is all about taxing and spending. those decisions are what need to be made. having this fire drill in markets where we all get excited, this bill is higher than that built and we might have a debt ceiling, it is more of a distraction than what is

really happening. jonathan: 1.3% for one month money? >> it may sound like a lot, but -- and i hate to burst the bubble, but you have to annualize it. obviously, the u.s. is not going to default. if you say, what if they did, what did you get paid for that? it is a four-week bill. you are looking at like .02% in compensation. even if this thing got delayed, how much did you get paid for that exactly? even with 130 yield, it would not look that good. jonathan: this lasted about five minutes when they decided to punt the debate until the end of the year. treasury yields popped a little bit. there was celebration on the sidelines that we might -- the prospect we might not have a debt ceiling anymore in the u.s. if we bring up a chart of real

yields, real yields are completely rolling over. you guys, and i've got to say everyone from pgim who sat around this table bullish like there was no tomorrow, the curve is going to flatten, we got basically what you anticipated. so where next? robert: i hate to say it, but this basically is not over. all the instances of when yields have rushed to 2.5% or 3%, you had unrealistic expectations about growth. if you go back to the first half of last year, we were 1.30 or 1.90 on treasuries, the economy was ok. you are not overheating. before the trump trade, you had a steepening program put in place, a revamping of policy, in japan. japan is very important on buying treasuries. that was pushing up yields here, and you had the ecb going to

taper. you had boj revamping and the trump trade that was supposed to, people in the extreme are very good at panicking in the short-term and getting bad news into the market. what was the bad news? you could have inflation on import tariffs, tax breaks to bring you growth, infrastructure spending, everything you can imagine, and things were up 2.50, 2.60, those yields were -- for us, even if all of that came through, those yields were too high. and you tell me, how much of that has come true? so right now, the hurdle is very high. they don't have that much to work with. the fact is the underlying economics are the economics. japan, the yields are incredibly solid, negative, low. europe low. jonathan: let's get to the underlying economics. a caller in question, trey parker i want to start with you. your take on treasury yields around 2%, with gdp growth around 2.5%?

trey: it is tough to reconcile the two. you have inflation 1.7%, below what the fed target is. you have gdp around 2.5%. something is wrong. i think the bond market is mispricing growth, so we have a different view for -- view from robert. we think there is an under expectation of growth and a lot of the technical aspects, looking for relative yields elsewhere in the world is perverting the market. i think the other thing that is amplifying that is a general tale concern of some of the geopolitical issues whether it is harvey, irma, or korea. i think those are all things weighing on investors head. so you see equity markets at or near all-time highs and bonds are 2%, we think technicals is a key factor. jonathan: let's get into it more. pgim has been dead right.

going forward, have we had capitulation yet from the treasury bears at the beginning of the year? is 2% the by point or is there more to come? trey: we think 2% is as far as its going to go. that is our view. eric: i would agree with that. i would be more in trey's camp than robert's camp. global yields being low causes treasury rates, and every thing else keeps that. all of the news about hurricanes, north korea, i think we are getting close to it. the other thing that is underpriced. what if we do this and the other washington? trump just cut this deal with democrats, what if we do get corporate tax reform? right now it is not priced in at all into the bond market. guy: -- jonathan: as we grind higher, when does pgim start buying again? 2.20, 2.25? robert: the market looks great.

this is not a one-week or one month for six months, the structural decline in rates are there. all the metrics people are using to look at this overtime, they are not changing fast enough to see what is really going on. there is not a bubble. the net demand for money is not there between the demographics and whatnot. long way to go. jonathan: you are sticking with us. robert tipp of pgim, eric stein of eaton vance, and trey parker from highland capital management. let's get your market check on .here hans have been twos, 10's, and 30's making new lows. we are down 11 basis points on the 10 year through the week. the flattener in vogue again. the final spread again. a bank of england rate decision. and another round of data on u.s. inflation and retail sales. we will discuss in just a moment. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." time now for the final spread. coming up over the next week, goldman sachs revealed a plan to turn around performance of its core bond trading unit. apple launches some new product. the much-awaited launch of the new iphone. aan-claude juncker's with state of the union address, not sure how many people are waiting for that. the bank of england rate decision on thursday. retail, sales and inflation from the u.s. on the same day. with us, robert tipp of pgim, eric stein of eaton vance, and trey parker of highland capital. trey, when are we going to get a read on the u.s. economy considering the events of the last couple of weeks. the natural disasters, etc. is it going to be a couple of months for this to come through? trey: i think there is definitely going to be a few months of pause in economic activity, a lot of it depending on the extent of which irma hits florida.

harvey will cause some noise in the numbers. you already saw it in some of the employment data earlier this week. there will be a two to three month lag in economic activity that should catch up. robert: obviously, you will have a drawdown and then some stimulus. -- losses don't get factored into the gdp data, but rebuilding does. is that going to be a few tenths of gdp that gets spread out over a decent period. jonathan: how much of the demand is going to be absorbed by the u.s. economy? >> the auto sector is a good example. we have seen cars went out in harvey, and who knows what happens with irma, so we will see that in the auto production. there is obviously more demand -- certainly not good from the capital stock perspective, but from the gdp perspective, there is obviously more demand in the auto sector. jonathan: when these numbers start coming through, they will

have a reflationary element to them. is that something the market will jump on with established biases waiting for those numbers to come through? robert: we will have to see. trading numbers is incredibly difficult. people will be watching for this. i don't know if there's a strategy necessarily of over reading or under reading, we will have to see how it comes up. jonathan: you will wrap things up by looking ahead to the week ahead. a rapidfire around. a quick series of three questions, one word answers if possible. you will have to use a couple of words for some of these. the base case for the ecb from here, 40 billion and a six-month extension, or 20 billion and a nine-month extension. what are we getting closest to? 30 four sixr 34 -- months. and within 12 months they will be out. eric: 46 months.

trey: 40, 6 months. jonathan: if you had to belong to the year end, 10-year bunds or tenure bdp's? robert: btps. eric: bunds. trey: bunds. jonathan: to wrap things up, ahead of the apple launch, do you want to hold apple equities or apple credit? robert: equity looks good. i think strategically markets are in good shape. eric: equity. trey: equity because i think rates are going up and the duration risk of the ig credit market is -- jonathan: we have to leave it there. from new york city, you have been watching "bloomberg real yield." ♪

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