♪' jonathan: from new york city, with 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ jonathan: coming up, janet yellen brushes aside plans to unwind the balance sheet and teases out rate hikes before the year-end. deliverrea threatens to a hard-line response to president trump. proxy, heavy for a debt loads continue to haunt retailers. why unwinding a $4.5 trillion

balance sheet is apparently nothing. >> i imagine janet yellen is doing cartwheels behind the scenes at how well the market has taken the balance sheet reduction. >> they say this will be very boring. it is all preannounced. it was all very transparent. there was no surprise in the announcement yesterday. i think we will be watching quantitative tightening in slow motion. >> i think she is trying to do as little as possible. she introduced tightening in monetary policy, and she was trying to do as little as possible with the dots to keep them as unchanged as they could be in the next 12 months so beyond that they can make the policy changes. >> the crisis is over. we still have policy levers largely at their emergency settings. let's return on a methodical basis the policy levers to

normal so we have the ability to control our economies. jonathan: joining me around the table today is greg peters, pgim, priya misra at td securities, and colin robertson of northern trust. great to have you with me. let's start with the fed balance sheet. the federal reserve has made making policy mistake after policy mistake for decades. this cycle we seem to have extreme optimism in them. is everything going to be ok? priya: if we look at every rate hike in this entire cycle, it was 90% priced in two weeks before. not werket did draft this week because it was the most widely telegraphed move. they are starting very gradually. i think it is hard to price out a year out when there is 30

billion in balance sheet that is still going to be issued. we are at a crucial point where the market cannot pricing, how are they going to fund the fed? is it all bill issuance? if the market does not have that information, we cannot president. to start out with 6 billion per month, that is something the market can handle. jonathan: what are your thoughts, greg? greg: it has to have some effect. if you believe qe, the sole purpose was to tighten risk premium, divorce people at the risk -- to force people at the risk curve, then the reverse has to have some effect. it might not be one for one, but it cannot be zero. i think the fed is getting extreme cover from other central banks. i think that is the story.

it is the ecb and the boj. jonathan: we can basically show the consensus that the federal reserve has of the overall stimulus pie. that is decreasing as the ecb and think of japan have increased stimulus. that is slowly rolling over. it is not the market does not care, but it is as great points out the ecb is giving them cover. colin: i think the ecb is giving them a lot of cover. i think the balance central banks around the world have on their balance sheet is significant. ton dropping 4.5 trillion 2.5 trillion over the timeframe the fed is talking about, i could see why investors are relatively call about it. janet yellen give herself room that if this is not done well, the fed may just stop and decide they will go ahead and stop the

case of bringing the balance sheet down. priya: you brought up policy mistakes, i wonder how much of that is priced into the reaction. the fact that the market thinks this might be a policy mistake, a lot of clients tell me no more hikes, maybe one more, and if you really think the hiking cycle is over, then i think to your point is the view that this is the unwind of the smallest ever unwind, i think the policy mistake issue is on the markets mind. issue, on ae demand-supply basis, there should be higher yields. if we look at this through the prism of the central bank responsible for inflation expectations, we know through history when they did qe, yields rose. inflationt it from an perspective. why is the reverse not also true?

why can't we see a federal reserve that unwinds the balance sheet, but treasuries get a longer bid. aiya: it is clear that it is policy mistake. when the fed was doing qe, real rates were declining, inflation expectation was rising. look what has happened to real rates. ever since they started the portfolio unwind, real rates have been rising. i think they can rise more. inflation expectation, there is not a lot of inflation. the fed is telling you it is a mystery, but we believe it will show up. inflation expectations are not all that attractive. they're still high relative to where they could be. >> the curve is flattening. jonathan: the curve is much flatter. >> something is happening. ten'su go back to two's, at christmas of last year, it is a big difference.

that is a pretty decent sized move. the expectation is if the fed continues along this path of tightening, the curve will continue to flatten. the yield curve is giving you a signal, i think, that the fed could be slowing down the economy too much and entering a policy mistake. jonathan: sterling at 92 basis points, what is the message that comes from that? priya: it is a similar idea that all the long-term growth is still low. all the fed can do is move the front end up while the long end stays anchored. i think a lot of that is going to depend on what the treasury does. if they announced 50-year bonds, i don't think there is that much demand for long end paper. if we get tax reform or tax cut that as to the deficit, and we

can talk about steepening, otherwise this will be a fed-led unwind without any fiscal easing. question getting a from the bloomberg, given the fomc 2018 dots, where do you think the opportunity is, in the long end for term premium or the short and for more than two hikes? colin: long end. with respect to what the yield curve looks like an curve flattening, the fed could find themselves in a real dilemma if the curve continues to flatten and there is the thought process of more hikes in 2018, they will have to take them off the table because they will not be able to tighten into an inversion of the curve. jonathan: do they trimmed their inflation expectation but maintain their expectation for hikes? this conversation could be redundant once we find out who will take over the board

position. to do that is hard to make sense of. overlay is until you expectations. i think there worrying about that very little. growth is strong, global, cyclical upstream. are asal conditions loose as we have seen them. i think they are focused on that more than the inflation picture. jonathan: that is going to lead them to make a policy mistake. are they focused on the wrong things? priya: they could continue to try to tighten financial conditions more. i wonder if it is the belief in stay zerot if arstar while the fed believes it is going to rise? i think that results in higher rates. i wonder if the fact that this

hawkish reaction function was also the function of them having a different reaction function because they are trying to normalize. we are getting that from all such a banks, we are trying to normalize the not tighten. i think then we will get inflation more. jonathan: i think everyone is trying to understand the reaction function. we will come back with gregory peters, colin robertson, and priya misra. donald trump made waves at the yuan this week with strong talk about -- u.n. this week with strong talk about north korea. that is next. this is bloomberg real yield. ♪

♪ jonathan: i am jonathan ferro.

this is "bloomberg real yield." last week we had taking a stand offering ann opening from that country. this week it is ukraine, its first foray into the market since russia invaded crimea in 2014. the demand for 50 year bonds was so high that it knocked the most 50 basis points off the initial guidance. this quarter has seen al-shabaab sales from south korea climbing to the highest levels since 2013. that includes a $1 billion sale by korea development bank. more torica had to pay settle 10-year bonds, managing to only attract $2.1 billion in bids for the $1 billion offered.

toys "r" us, a quick descent into bankruptcy shocked markets this week. which other retailers will debt?le to harness their investors are left e-cig, why did no one -- asking, why did no one see this coming? joining us debt? is priya misra, colin robertson, and greg peters. that chart is stunning. within two weeks, we rollover to $.29 on the dollar. why? >> i think people were surprised by the timing. if you think about the toys kinging this is, it is pea heading into christmastime. i think investors thought they had more runway. they found out they did not. that is an interesting story because it is a holdover of what happened last cycle. 2005rt of the lbo boom

deal that was extremely levered. it is less of a retail story and more of a too much debt story. you need to separate those issues and not paint retail under the same brush. jonathan: we can show that. the debt servicing costs of this company was phenomenal. they were pushing half $1 billion a year in some years in the past. is this a stand-alone story? if we know about this, i go back to the chart of the credit, why didn't people see it coming? it wasn't in the price at all. comingink people saw it in the sense that it was a when, not if. the thought process was get through the christmas season until 2018, but clearly it was knowable, as you stated, but there are other knowables out

there of other companies that are overleveraged. it is not a total one-off, but you don't throw away the old sector because of this issue. greg: that was a one-year piece of paper you were showing. it was dampening between the raindrops. this,an: we talked about the bottom line is markets and investors failed to price default risk. it is not like we were trading in the 80's, we were in the high 90's. we were not pricing in anything. was asset panic? the banksaw this in space with banco popular. the markets seem to be surprised by these events. i don't think it is broad-based. i don't think the market is categorically mispriced. i think this is an idiosyncratic issue that took the market by surprise. we have seen in increase,

probably, of idiosyncratic -- broadly of idiosyncratic issues. the rest of the high-yield market is up 2%. i think these are localized issues. it is not endemic. jonathan: let's talk about a price. we can overlay the bloomberg high-yield index with high-yield energy and high-yield retail. there is quite a spread, 100 basis points over energy, and 200 basis points over retail. points over retail. it interests me that those two things are rolling over, getting tighter over the last month. greg says the price is justified. is what you are seeing justified? colin: i agree with greg. i think the market is fairly priced. you have some circumstances where maybe we have gone tighter than where some believe in some

sectors, but the bottom line is there is still a hunt for yield and still a reason to be confident in high-yield. i think the prices are fair, and the prices will tighten from here. jonathan: his conviction high? colin: conviction is not that high. that is a tougher spot and a good question. i think there is nowhere else to go in some cases. the central banks are a big part of this. they leave investors in the market with only limited choices, and this is an area where the choices a good one still. jonathan: from a macro picture, i wonder how many companies the fed is keeping in business that should not be in business? priya: that is right. risk reward becomes a little stretched. they have been talking about this for a while, the amount of dollars that outside of the u.s., and they had delivered fx

forwards on that. not only do you have the fed and the unwind, if the ecb starts tapering, do we get a rise in rates? maybe it is idiosyncratic and not the entire market, but from a systemic basis, i think the market will get worried. i think it is an excellent point. i just don't know that it is now. what we are worried about is that the ecb taking stimulus away but doesn't seem to be here and now. i think high-yield is very different than investment grade. the difference of the high-yield market versus the investment grade market is investment-grade companies have feasted on this low yield environment. each year is a new record in terms of gross issuance. they are levering up. high-yield is a different story, which makes toys "r" us interesting, because postcrisis

you have this cap at six times that is containing the high-yield market making it a much more rational market. jonathan: you are sticking with us. greg peters of the gim, colin robertson of northern trust, and priya misra of td securities. we are taking a look at the treasury markets. yields are higher on two-year. the 10-year the same amount. the 30-year by three basis points. it is still a flatter curv e. still ahead, mario draghi, yelling, and carney next week.

♪ michael: that's -- jonathan: jonathan ferro. german election coming up this

weekend. shinzo abe might call a snap election. we have mario draghi, janet yellen, and mark carney all speaking and a possible health care vote in washington, d.c. joining us is greg peters of pgim, colin robertson of northern trust, and priya misra td securities. banks given that central are driving prices, i think it is a good thing when you have to much, the confusion, i think there will be with the leadership at the fed. apart from janet yellen, there are 11 other fed positions speaking next week. we want to understand long end rates, inflation, what gives them confidence on inflation. i will be watching mario draghi little more. he has to signal. jonathan: that is the guidance. it doesn't look like they have a

clue what they are going to do yet. greg: it does not look that way. the last meeting, the market interpreted that there is something to do in october. i think all eyes are on him to clarify that statement even though he did not say anything. markets are looking for him to clarify. jonathan: what is your base case now? greg: i think it is steady as she goes. if you look at inflation numbers, that are lower today, i think there are real challenges that are structural. they have to do something. i do think they may announce something, but they could also extend it at the same time. jonathan: has janet yellen made mario draghi's life a little more difficult? colin: definitely. there's no doubt about that. she makes my life more difficult

because within the fed we have no idea if they think inflation is structural or transitory. until they come to a decision on that, they areshe makes my lif's life difficult and all of ours, too. jonathan: they are still maintaining interest rates and expectations for them as they are. are we surprised the next time we get the summary of economic expectations? colin: i think that is possible. i would not be surprised, but i would say i'm not sure. given what the fed has projected they're going to do next year, i think a lot of things need to hit on perfect cylinders for that to happen. jonathan: is it possible you get to the end of the year, and the story has changed on the fed inflation expectations? priya: i think it is hard for them to capitulate on the entire phillips curve. if the labor market comes back, a lot of faith is based on the fact that the labor market tightens, but if it is still chugging along and is to locate a year from now and we are not seeing inflation, i think she is

taking a lot of faith in the fact that half of cpi was wireless driven. i wonder if the fed things they are in a bit of a catch 22. they think inflation will pick up, so they want to hike, but by hiking too soon they prevent inflation from happening. pgim,an: greg peters of priya misra td securities, and colin robertson of northern trust asset management. we will see next friday at 12:00 new york time. we will bring you a week full of fed speak with draghi carney as well. this is "bloomberg real yield." ♪

vonnie: it's 12:30 p.m. in new york, 530 p.m. in london and 12:30 a.m. in hong kong. items vonnie quinn.

shery: and i shery ahn. welcome to "bloomberg markets." funny: from bloomberg world headquarters in new york, here are the top stories on the bloomberg and around the world. goober loses its license to operate in london. er loses its license to operate in london. we get the company's response. and amazon is looking to crack the code on food delivery. details on the e-commerce giant latest efforts to muscle into the restaurant business. sher