♪ jonathan: from new york city, i'm jonathan ferro. with 30 minutes dedicated to 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. synchronized growth story does not seem as with the bond market. 2018 looks increasingly uncertain. the ecb is still exploring qe options. the white house is said to be considering six candidates for the 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 your fundamentals are improving. >> the currency has found 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 the result of a good demand sharp, not an 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. i don't know if you change monetary policy. i don't know if it would affect it much. i don't know if the euro is now affecting the changing growth rates now established by the euro. >> they're not announcing some sort of tapering the decision ahead of the governing council. he really did not have a lot of leverage with his words

. jonathan: joining me is robert tipp, chief investment strategist at pgim limited, also eric stein from eaton vance, and trey parker at highland capital management. great to have you on the program. here's the thing that jumped out at me over the last couple of months. it is 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 the euro why can we dollar. have bond 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 the crisis. they moved on to a new mode of stimulus. they broke any link to the idea that this was a central-bank motif, they would never do qe, and they went massively into qe and groundbreaking in terms of a major central bank going

negative on interest rates. they were chasing money out. as if that was not enough, they moved on to political fragmentation, concerns about the netherlands and austria and the greek package in the balance, concerns in italy, and you had the le pen situation. 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, say like japan, which has ironically strong currency, is there. they now have a cyclical upswing going on. the politics are coming together. unless you have steady outflows on the portfolio side, this will be a strong currency. jonathan: that all makes sense

except bund yields on -60 basis points. why would you want 2-year note's out of germany when you can have a strong reallocation to europe? >> there is still some fear premium. the ecb not buying bunds, there are not that many of them. jonathan: if i truly believe the ecb is going to step back, why aren't two-year note yield in germany higher? >> i think mario draghi really has to tight rope monetary policy. he does not want the euro that strong. he wants to slowly normalize and slow down the pace of quantitative easing. look at global yields. global yields have been falling. 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 euros appreciation is the inverse of dollar weakness in addition to the

positives we mentioned in your. 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 the capital key. a quarter of their purchases every month are getting squeezed bund market. that market is really the leader in terms of being under pressure. jonathan: trey parker, after hearing from 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 about euro strength. on a trade weighted basis, it is only up 6% this year, and they can handle that given the growth outlook but they are seeing across the eurozone. we think the fed and ecb are in

wait-and-see modes relating to 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 40 first six months or 60 to 20 over nine months? where are we? trey: i think they will start moderate. this is too big an experiment to go aggressive with reduction in the tapering. just like the fed, they will guide with moderation initially and see how that goes. that potentially they will increase it later in 2018. jonathan: rick rieder from blackrock has come onto the program before and we have talked on this program about obsessing over the sharp nearness to the boat. that is obsessing over what the ecb does next. about a mile away is european politics. does that reassert itself into the bond markets and financial

conditions? eric: i think it does. there been a lot of positives this year 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's a lot of debt and contained spreads because of ecb purchases. the debt trajectory is sustainable for right now. this bond yields were to normalize, it really is not. just like markets over concerned last year, they may be getting overoptimistic this year. in europe, there are still issues at the cold war of how much sovereignty they should have. it's a little complicated, but when you look at it if you compare the u.s. and europe, when they created the euro out of nothing, they really created a tremendous fiscal process that they immediately violated. what has happened with the financial crisis and euro crisis

is they have really regrouped. at first they wanted to drive try the private sector involvement, and that was obviously a disaster. instead they tightened the fiscal restraints, tightened the for approval. 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 they basically restructured the banking sector and took money out of deposits to right the situation. how does this matter for italy? if europe was in disarray and to have italy on the brink, that they are a little bit owned by what is going on there. right now europe is looking great and italy is bob man out. -- the odd man out. i think they will make their way through, although it is not a great-looking situation.

jonathan: think about how tight things are trading right now. lloydr this week, blankfein came out and said he worries when corporate bond yields trade below dividend yield. look no further than europe. take the euro and compare it to the stoxx 600 yield on high-yield europe, is that a cause for concern? eric: thinking broadly about global central banks, why are they tightening? is inflation out of control? no. this growth great? no, it's ok. it is financial stability. whether it is u.s. high-yield or european high-yield, whatever credit market you're talking about, they are getting compressed, which is a specific goal. sometimes there is too much of a good thing. that is the number one focus of central banks right now -- financial stability. trey, something

that does not come up much at the ecb news conference. should it? how frothy should it look? trey: i think their sole mandate is price stability. from a u.s. perspective, asset bubbles and one of the things growth provides an low rates provide is the ability to create those excesses. they have to worry about trading demand andlse elevated 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 on the program, the auction block the day after the u.s. holiday labor day was one of the busiest so far for investment grade corporate bond offerings. we will bring your wrap in just a moment. 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 bit of a nervous market ahead of some bid auctions . look at this past tuesday's full week treasury auction. investors demanded the highest rates since december 2008. $20 billion in bills sold at 1.3%. over in corporate's investors clamoring for bonds now that 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 l -- a 30 year security with the yield of 1.4 percentage points. comcast, investors still buying

media debt in a big way. discovery communications sold six point $3 billion to help finance its takeover of scripts. the largest portion $1.25 billion of bonds maturing in 24/7. joining us robert tipp, eric stein, and trey parker. i want to begin with eric and ask him about the four-week treasury bill earlier this week. why 1.3%? why higher than the debt ceiling experiences that we've had previously? eric: i honestly don't have a perfect answer for you, but to me 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 misfire drilled markets were someone is excited where this bill is higher than that bill and we might have a debt ceiling, it is more of a distraction than what is really important going on in financial

markets. jonathan: 1.3% for one month money? >> it may sound like a lot, but you have to do you annualized it. obviously, the u.s. is not going to default. if you say, what if they did, what did you get paid for that? you are looking at like .02% in compensation. robert: that's with 100% of downside. even if the thing ended up getting delayed, you it's a how much would you get paid for that? even with the 130 yield, it would not look that good. jonathan: this lasted about five minutes when they finally agreed to punt the debate to the end of the if it treasury yields popped a little bit. the prospect we might not have a debt ceiling anymore and the united states, and then reality started to bite. blows north of 2%. if we bring up a chart of real yields, real yields are completely rolling over.

everyone from pgim who sat around this table out front on treasuries bullish like there , was no tomorrow, the curve is going to flatten, we got basically what you anticipated. where next? robert: i hate to say it, but this basically is not over. all the instances where yields have rushed to 2.5% or 3%, you you had an unrealistic expectation about growth. if you go back to the first half of last year, we were 1.30 or 1.90 on treasuries the economy . . the economy was ok. before the trump trade, you had a steepening program put in place in japan. japan is a very important buyer of treasuries. you had the ecb going to taper. he had the taper tantrum, the

boj revamping, and the trump trade that was supposed to, and people on the extreme were good at panicking in the short term. what was the bad news? you could have inflation on import tariffs. these should have tax breaks and structural reforms to bring you growth, infrastructure spending, everything you can imagine, and .hings were up 2.50, 2.65 those yields were too high. how much of that has come true? the hurdle is very high. they don't have that much to work with. the fact of the matter 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 with the following question. your take on treasury yields around 2%, with gdp growth around 2.5%? eric: it is tough to reconcile

the two. you have inflation at 1.7%, below what the fed targeted. you have gdp around 2.5%. something is wrong. we have a different view from robert. we think there is an under expectation of growth and a lot of the technical dynamics of the said continuing to buy treasuries and foreign flows looking for relative spreads or relative yield elsewhere in the world is perverting the market. the other thing amplifying that is the general tale concern of the geopolitical issues out there today whether it is harvey, irma, or korea. i think those are all things weighing on investors heads. easy equity markets near all-time highs, and so we think technicals are key factor behind that. jonathan: let's get into it more. the pardon of proof so far has been on the high-yield crowd.

pgim has been dead right. going forward, have we had capitulation yet from the treasury bears at the beginning of the year? his 2% the brightpoint or is there more to come? >> we think 2% is as far as its going to go. that is sort of our view. eric: i would agree with that. i am more in trays camp than roberts cap. global yields being low causes treasury yields and with all the news about her chance, that's cap all things out. assuming nothing bad happens, i think we're getting close to it. what if we do get something out of washington? trump just cut this deal with democrats to push the debt ceiling off. what if we do get corporate tax reform? right now it is not priced in at all in the bond market. jonathan: as we grind higher, when does pgim start buying again? robert: the market looks great. we have been honest. this is not a one-week or one

month or six months. the structure of the 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 of highland capital. let's get you market check on where bonds have been this week. twos, tens, and 30's making new lows. we are down 11 basis points on the 10-year. 10 on a 30 and seven on a two-year. er in vogue again. a bank of england rate decision. another round of inflation. 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 products , with the much awaited launch of the new iphone. a state of the union address, not sure how many people are waiting for that. the bank of england rate decision comes on thursday. and we get some economic data -- 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. when are we going to get a clean read on the u.s. economy considering the events of the last couple weeks? 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 irma hitting florida. harvey and of itself is going to

cause noise in the numbers. we saw it in 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 you are going to have some stimulus. economic losses get factored into the gdp data. ahead isarters of th , that going to be a few tenths of gdp that gets spread out over eriod?nt p jonathan: how much of the demand is going to be absorbed by the u.s. economy. eric: 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 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, waiting for those numbers to come through? robert: trading the numbers is incredibly difficult and we will be watching this. i don't know if there's a strategy necessarily of over reading or under reading, but we will have to see how it comes up. jonathan: we are going to wrap things up the way we usually do it by rapidfire round. a quick series of three questions, one word answers if possible. you have to use a couple 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 6 months, 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 btps?

robert: btps. eric: bunds. trey: bunds. jonathan: to wrap things up ahead of the apple launch, after lloyd blankfein's cautious take on corporate bond yields versus dividend yields, do you want to hold apple equity or apple credit? robert: equity looks good. i think strategically markets are in good shape. eric: equity. jonathan: finally to you trey. trey: equity because i think rates are going up and the duration risk of the credit market -- jonathan: we have to leave it there. from new york city, you have been watching "bloomberg real yield." ♪

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across all your locations. hello, mr. deets. every branch running like headquarters. that's how you outmaneuver. ♪ matt: coming up on "bloomberg best," the stories that shaped the week in business around the world. things get testy after north korea's latest nuclear trial. another fed seat opens up as stanley fischer is stepping down. >> by february, you could see five new people on the fed. matt: the ecb leaves stimulus settings unchanged. >> the euro is rising despite the ecb. matt: president trump gets rid a and delays a dac l on the debt ceiling.