vonnie: -- jonathan: this is "bloomberg real yield." ♪ jonathan: coming up, global reflation shows signs of life. price pressures grind higher. central banks react. the bank of england gives off its first in a decade. the reach reveals shows no sign of ending. austria with a yield of just 2.1%. global reflation showing signs of a comeback. >> inflation remains well below

2%. 1.6. cpi is 1.7 or that allows the fed to go slow. >> gradually pushing inflation back to normal, we don't see anything that will push inflation to levels where becomes a market issue or forces central banks to accelerate rate hike plans. >> you should probably start to tighten when you see the whites of the oz of inflation -- the eyes of inflation. this isn't anywhere near the whites of anybody's eyes. >> we want some duration on portfolio, but too much duration is risk. we don't think this trend is going to be structural. it is transitory in nature. >> the bond markets continue to be distorted. it is extraordinary to see. we just talked about u.k. inflation heading out, putting pressure on inflation rates all over the world.

on markets are still not responding and appeared very stretched. jonathan: joining me around the table is george rusnak of wells fargo, kathy jones, fixed income usategist, and coming to from atlanta is matt brill of invesco. you,, let's start with inflation for the weekend which was most important chinese api or u.s. cpi? kathy: it is hard to translate chinese wholesale prices through to the u.s. and the rest of the world. i think the u.s. was significant. yields last year year just north of 2%. i think a lot of that was the result of the pulled

back we had of the risk off trade coming back. you are seeing risk off coming back. yields are reaping up more than inflation. jonathan: the chinese number at the start of the year was vertical for the reflation trade. will it be important in the coming months, and can we maintain that trend? commodityything but a rebound fueled by a weaker dollar? kathy: i think they are both what we are seeing in the data. we had a pullback in the dollar against chinese young, giving us a rebound in commodity prices and hurricanes from in there. i don't think there is much more to it. jonathan: in terms of inflation data globally, the u.k., china, the u.s., it has started to grind higher. the bank of canada has started to make a move, and the bank of england is talking about making a move. calibrated orlly

addressed what they think is going to happen with the fed. what you think that is? matt: we think the fed is going to hike in december. that met we got cpi expectations. we expect the fed to come around by the end of the year. jonathan: in terms of communication, the fed spent so much time trying to talk to the market, the boe spends years talking, the bank of canada just doesn't. why doesn't anyone else just do it? kathy: this is part of their strategy to not shake things up. the problem now is we have them and somethingng else. it is hard to interpret when they are all saying different things. jonathan: we will get the summer

of economic projections in the federal reserve, what is it worth for next year and the year after one hardly any of us have a clue who is going to be at the fed? george: there are some changes coming on board with chair yellen. expectations have not been as good of a predictor of what is going to happen. they have been coming down dramatically. we expect to see them forecast three interest hikes next year and that could come down to two next week when they release that number. jonathan: we have the bank of england talking up a rate hike. inflation in the u.k. is at or .3%. a lot of people are questioning when wage growth is really going to take off. washing the u.k. and bank of england have so much conviction in those old economic models that in the last several years

don't seem to have been working so well? matt: they have not really work for anybody. i'm not sure why they would have any conviction. the devaluation of the pound post-brexit, so i think we have to see if you -- a few more numbers to see. from october, i think you'll see pullback in quantitative easing. we hardly seen them stop buying corporate credit. jonathan: in a couple months we will get the inflation report from the bank of england. i have seen this movie several times since 2014 when governor carney first went to the mansion house and talked up the prospect of a rate hike. he was called the unreliable voice, because he did not deliver. why is this time different? kathy: other than the valuation of the currency, i don't know why this one is different.

primarily by the currency. we will see if the economic prospects post-brexit don't look so good. adjusted tolt has the prospect of rate hike. you have mentioned the politics, the forecast from the bank of england, i don't know what they are worth either when no one knows what the relationship with the european union will be. how can these guys hike when they don't have any clarity on what the future holds? george: it has been a dramatic shift. when you think about where they were, they were in a waiting phase until march of 2019, now it is may have 2018. they have actually moved it now to this year, october or november. what you are looking at is inflation tick up to 2.9% and above 3%.

it is moving significantly. jonathan: why can we have a similar unemployment rate to the u.s., yet the market is seriously thinking about rate hike for the bank of england announced much the federal reserve? why is the market pricing in more rate hikes for the giving want them the federal reserve -- bank of england than the federal reserve? inflationhaven't seen in the u.s. in the u.k., inflation is mainly caused by fx. there are wage pressures in the u.k. that are real. you are not seeing that in the u.s., and you are there. the u.s. has been such a tough problem that they will be more accommodative in the future. jonathan: you are sticking with us. george rusnak, kathy jones, and matt brill. coming up, the auction block,

what a week it was. the headline is the yield. that is next. ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block where we had eye-opening debt sales this week. the yield for the 10 and 30 year treasury auctions seeing totals we haven't seen in years. sinces the lowest november. the 30 year yield the lowest since october. austria saw demand for the $500 million of its 10-year notes that were so high it not 90

basis points off the initial offering. att allowed them to sell 7.125%, allowing them to sell at dish -- the country sold 3.5 billion euros of debt, the biggest ever sell of bonds out of europe. george rusnakis of wells fargo, kathy jones, and matt brill of invesco. your reaction? kathy: i am stunned. it seems as if people believe in a deflationary trend persisting for decades in europe, otherwise institutions that need to own

long-duration, i don't know who would buy. jonathan: that was the size of the order book. a lot of people wanted to buy it. kathy: i think it was desperation for any sort of positive yield. when your choices between negative and positive, they will take positive all day long. jonathan: just in terms of the duration risk, we can do that on the austrian debt, what does it take to get a 5% or 10% move? we just need to back out 20 basis points, and you will get a 10% move. the duration people are taking is quite significant. >> it is. i don't know if they are looking at it totally from a return respective. i think there is just a

tremendous demand for duration assets, and this is feeding that demand. i don't think it logically make at,e to buy 100 your debt if you have to have a, this makes sense. it certainly makes sense for the issuer, does it make sense for the buyer? i am not so worried about austria doing a 100-year debt deal. it is a reach for yield. insurance companies need duration. invesco, we have a simple rule, if you cannot find something on the map, you don't buy it. i don't know where to take a stand is, so we would not buy it. this week, that is a lot better to buy for the term.

jonathan: it was in the prospectus, they actually put the map of where it is in the prospectus. people still bought it. you mentioned some names. where do you think people are still graduate -- gravitating towards, duration risk or the kind you would buy from tajikistan? u.s. they should be buying credit. you either have to sacrifice credit or liquidity. when you buy 100-year bond, you have to sacrifice liquidity. we are not willing to do that. we think we will be much better off in the future because of that. jonathan: after 15 years, he shut down that fund. this is what he thinks is the most distorted market on the planet. take a listen. >> inevitably there will be an

air pocket. where is your protection? in protection terms, i think the most distorted asset class in the world is the two-year german bond. people are willing to lose 75 basis points a year for security. you don't need that security. it is the wrong trade. jonathan: that is a stubborn trade. kathy: the problem is we have been saying that for how long now? jonathan: quite a while. kathy: people get tired of fighting the trend. it doesn't make sense. i am not willing to pay the government of germany for the privilege of buying their debt. jonathan: the depot rate of the ecb is -40. they are talking about going back. but they haven't really moved. >> they are pulling back on qe, but not necessarily on their

rates. negative seven basis points doesn't make sense, but it does when -40 basis points is your alternative. in an absolute perspective it does not. at some point you get through quantitative easing, then you address rates, then you see significant moves. jonathan: will this happen in the next several months when the ecb finally communicates what is coming next? >> i think it is more a 2019 story. 2018, they are setting the path forward. they will be picking up the pace in 2018, and 2019 they will start picking up rates. jonathan: how much risk is in investment grade credit? given the fact that ecb has been buying corporate's, you see how europe is price. certainly some of that has bled across into europe. effecte see the domino

buyingthey have been 10% of all new deals. they were buying 10 billion euros a month earlier in the year. now they are buying five. there is a structural demand for credit and yield. even when central banks are starting to pull back, we don't think you will see a complete unwinding of the situation. jonathan: stick with me. george rusnak, kathy jones, and matt brill. we will get a market check on where yields have been for the week. 15 basis points on the 10-year. kissingt week year-to-date lows. onet yellen and details shrinking the fence balance sheet. this is "bloomberg real yield." ♪

♪ i am jonathan ferro. this is "bloomberg real yield." coming up over the next week, a week full of politics and monetary policy. donald trump will make his first u.n. appearance. the general debate at the general assembly. we get right decisions and news conferences from the fed and boj. we'll have news and interviews from the number world business forum in new york. still with us is george rusnak from wells fargo, kathy jones, and matt brill from invesco. kathy, i want to look forward to next week. what is your sense of the treasury market positioning going into next week where we could get the unwind of that massive balance sheet?

kathy: we're have had pretty sizable bounce off of the lows of this week. i think what janet yellen says will be dovish, and the unwind will be slow and gradual not have a big impact in the short run, leaves us vulnerable to surprise on the upside. jonathan: 220 are we more appropriately priced going into this week? could back upings a little bit before year-end. this particular meeting will be focusing on the balance sheet and not necessarily raising rates. jonathan: what is the main thing you are looking out for, matt? matt: we think they will continue to be transparent, walk you through every step of the way. they don't want any surprises. back on them in trouble in the past. we saw taper tantrum.

they don't want that. are listening to what they will have to say and what they will try to end things. jonathan: will we get the summary of economic projections? we have laughed about it before. 2018, basis of year-end they are seeing rates pretty much where the 10-year is now for the fed funds rate, just north of 2.10. user someone is really wrong, the treasury market or the fed, or the yield curve is just want to look like this, deadline. -- dead flat. kathy: someone is wrong. i think the fed will probably bring down some of their dots. we will get 2020 now for the first time. jonathan: for whatever that is worth. kathy: as you say knows who is going to be in charge. i think the market is too

complacent about the risk of fed tightening. i think the market is just not discounting and a based on the history of the fed being run. jonathan: i wonder why they are complacent now. where are they going to come from? kathy: if we get more of a bounce in inflation than the market is expecting now, and they are not building in any premium for inflation. george: perfect time for them to build up their balance sheet. they have wanted to talk about this for a while. if they do it right, it cou ld steepen the yield curve. jonathan: yes, treasuries have not done much in anticipation of this balance sheet move. aing really believe unwinding $4.5 trillion balance sheet is not going to cause ripples in the market? underweight

mortgages. we think 2.20 is not the right number. is0, 2.60, we think that close. jonathan: we will look back on the last week and 20 minutes and ahead to next week as well. one question, one word answers or limit those if possible. england or the federal reserve, nexxt to hike. george: bank of england. kathy: the fed. george: bank of england. or austria? year matt: none of the above. i will take has you stand through the end of the year. germann: is shorting the two-year the new widow maker on the yes or no? george: yes.

matt: yes. kathy: yes. jonathan: thank you for joining us, george rusnak, kathy jones, and matt brill. we count down to that reserve decision with janet yellen next week, full programming here on bloomberg tv and bloomberg radio. that does it for us. we will see you next week. kong, watch hong the replays over the weekend. this is "bloomberg real yield." ♪

p.m. in new york, 5:30 p.m. in london and 12:30 a.m. in hong kong. >> welcome to bloomberg markets.

>> from bloomberg world headquarters here of the top stories that we are following. investors are shrugging off the latest provocation from north korea as the rogue regime follows a second missile over japan. we break down the market moves. google's parent company is possibly setting its sights on a major stake, and reasons behind the move involves uber. giants, what they are saying about the latest geopolitical turmoil. shery: let's kick things off with a check of the markets. the major averages, we are looking at another