♪ jonathan: from new york city, i'm jonathan ferro. 30 minutes dedicated the fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, congress clears legislation to suspend the u.s. debt limit. president trump would like to scrap it altogether. the global synchronized growth story resonate with the bond market. treasuries grind to new lows for 2017. and 2018 looks increasingly uncertain. the ecb is still exploring qe options. and the white house is said to be considering six candidates for fed chair. we begin with the big issue. 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 why they are not too concerned about the euro is it seems to be an exogenous appreciation, 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. he is trying to tight rope between not announcing or pre-announcing a tapering decision ahead of the governing council, he really didn't have a lot of leverage with his words. jonathan: joining me here is the head of global bonds and chief investment strategist at pgim

fixed income. also eric stein from eaton vance, and trey parker at portfolio manager 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. bunds versus euro-dollar. my first question goes to you. why can we have a bond market that drives bund 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 never do qe.

and they went massively into qe and groundbreaking in terms of a central bank going negative on interest rates. they were 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 was in the 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 now 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 at -76 basis points, why do you want two-year notes out of germany when you can have a structural reallocation to europe? >> i certainly think 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: that is my point as well. if i truly believe the ecb is going to step back, then ok, a stronger euro, but 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. it does not wanted that strong, but 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 currencies at eaton vance is one versus the other. the dollar has been weak this year. part of the euro's appreciation is just the inverse of dollar

weakness in addition to the positives we mentioned on europe. >> the other thing on buttons that is unique is there is no supply. the fixed supply is a small market to begin with. and then the ecb is buying based on their capital key. which means a quarter of their purchases every month are getting squeezed into the bund 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. because on a trade weighted basis, the euro 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 a wait and see mode 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 go 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 then potentially they will increase it later in 2018. jonathan: rick rieder with blackrock has come on the show before and he has talked 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 an italian election possibly. does european politics reassert itself into the bond markets and financial conditions? eric: i think it could.

there have been a lot of positives with the french election. there has been a tail geopolitical risk in europe. italy isn't really growing. a stronger euro does not help italy. there is a lot of debt with a low bund yields. and contained spreads because of ecb purchases. the debt trajectory is sustainable now. but if markets normalize, it really isn't sustainable. that would be an issue in europe. just like markets over concerned with populism last year, markets might be getting overly optimistic given the french election. europe, there are issues that core of how much sovereignty countries it should have versus how much commonality they should have. robert: it is a little complicated but 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 financial crisis and euro crisis is they have really regrouped.

and so, at first they wanted to drive the private sector involvement, and that was obviously a disaster. instead they tightened the fiscal restraints and the processes for approval of budgets. they began to make examples out of individual countries when the eurozone was acting in a position of strength. an example of that 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 they have italy on the brink, 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. you are seeing politicians step back from the rhetoric. 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 -- look no further than europe. if you look at the dividend yield on the stoxx 600 on high-yield europe, is that a cause for concern? eric: i think if you think broadly about global central banks, why are they tightening? is inflation out of control? no. it's ok, but not great your it is financial stability. it is the frothiness in spread. whether it is u.s. high-yield or european high-yield, whatever credit market you're talking about, they're getting compressed. the 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 soul 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 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 of course trey parker. coming up, the auction block the day after the u.s. labor day holiday. was one of the busiest so far for investment grade corporate bond offerings. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro. 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 had a nervous market ahead of some bill auctions. look at this past tuesday's four week treasury auction. the highest rates since september 2008. $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 a subscriber loss of forecasted by 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. -- in 24/7. -- in 2047. 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 bill, and we might have a debt ceiling, it is more of a distraction than what is important on what is going on. 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 de-analyze it. -- de-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. with 100% of downside. even if this thing got delayed, and there was some oddity they would say 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 at the prospect we won't have a debt ceiling anymore in the u.s. then reality started to bite. treasury yields just -- 2%. 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 exactly 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. we were not overheating. before the trump trade, you had a steepening program put in place, a revamping of policy, in japan. japan is a very important buyer of treasuries. that was pushing up yields here, and you had the ecb going to taper. you had their taper tantrum. 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? it was well, you could have inflation on import tariffs. you should have tax breaks to bring you growth, infrastructure spending, everything you can imagine, and things were up 2.50-2.65. 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 bloomberg subscriber has written in with the following 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 from robert. we think there is an under expectation of growth and a lot of the technical aspects, continue to look for relative spreads or 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' heads. 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. the burden of proof so far has been on the high yields -- 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 buy 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. certainly, global yields being low causes a treasury yields, 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 get this out of 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. jonathan: as we grind higher, when does pgim start buying again? 2.20, 2.25? robert: the market looks great. i'm -- i mean, we have been honest.

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 over time, 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 where bonds have been this week. twos, 10's, and 30's making new lows. at the moment we are down by 11 basis points on a tenure through the week. tenement 30, 7 on a two-year the. flattener in vogue again. still ahead, 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 reveals 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. jean-claude juncker's with a state of the union address, not sure how many people are waiting for that. the bank of england rate decision on thursday. and economic data, retail, sales and inflation from the u.s. on the same day. to discuss, 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. but certainly, 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, which should catch up from the economic data. robert: obviously, you will have a drawdown and then some stimulus. economic losses don't get factored into the gdp data, but rebuilding does. in the quarters ahead, 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 sales come down given all of the 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: from a trading perspective when these numbers start coming through, they will have a reflationary element to them. is that something the market jumps 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 out, where the numbers are. 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? robert: 40 or 30 for six months. it will signal that. and within 12 months they will be out. eric: 40-six months. trey: 40, 6 months. jonathan: if you had to belong to the year end, 10-year bunds or 10 year btp'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. great to have you with us. from new york city, you have been watching "bloomberg real yield." ♪

♪ announcer: the thrill of living well is in the pursuit. the pursuit of the rarest experiences. the pursuit of the finest products. the pursuit of quality in everything you do. and in all of these pursuits, you need the best intelligence to make the best decisions. >> we know that she sells for a lot, but what makes her important? >> it isn't easy. it's difficult work. announcer: welcome to "bloomberg pursuits," where you find information that helps you follow your inspiration. in this edition, utility meets luxury in three new suv's. hannah: immediate power. immediate response. announcer: master the offbeat etiquette of eating ramen. ivan: it's totally cool to just pick up the bowl and drink from it.