tom: i'm tom keene and for jon ferro. yield.""bloomberg: real coming up, will it be low rate kevin as the president meets the former fed governor. in this hour, will chairman wars keep the real yield lower for longer? yellen speaks, the nominal yield spikes higher, a little transitory september gives way to an inflated october and december. a real yield hogs, we consider the frenzy over the loan market.

we start with a big issue interest rate risk in the bond , market. >> during the summer, it was almost as if bond investors were making another run at treasuries. they wanted to get the 10 year below 2% one more time and it is built on the base of market is never going to grow again, we will not see any fiscal policy, and it was really about growth. i think they had it completely wrong. >> the fed is moving towards regaining credibility so investors in the market there like ok we know what their plan , is, we can make investments based on this and you will see people reacting. >> the fed has clearly said this is what we want to do. they want to reload their cannons. they want to get the balance sheet down and normalize the front-end of the curve. you see the betting odds on the december hike changed dramatically. >> the fed views low inflation as allowing them to continue

with a gradual pace. the market thinks fed shouldn't touch rates unless we are at 2% inflation. >> i do believe janet yellen. i do believe that the u.s. economy is strengthening and this time, it has been well signaled and markets will take it in their stride. tom: joining me today, we have a terrific lineup. three pros worried about the interest rate risk and this the we see this week on potential fed nominees. jim king is chief investment officer at blackrock. joining me, the cohead of high-yield at goldman sachs. joining us, mark from timko in -- from timko in newport beach, california. this will be a great reset into the fourth quarter this year. rachel, let me start with you. bring up this chart if you can, daniel. this is an equity chart.

brian belsky, an equity guy, you look at the equity quiet -- there is bond quiet as well. we are at a historic monthly low in the mix. vix. the how big a headache is that for you at goldman sachs? rachel: we think volatility is due to rise in the course of the next year. it is likely to be the result of the beginning of tapering. we are coming out next week with a client piece subtitle of which is the long unwinding road. global banks will be unwinding, not from the same starting point, but it will begin to tighten financial conditions into next year between the financial tightening conditions and the potential for political risk and policy risks, there is likely to be higher volatility and therefore the for the chief the spreads will be higher. tom: the basic idea of hard

data, soft data, can we develop a theme? do we have enough confidence in the path of the hard data? >> you brought up a good point and the word confidence. if you look at what yellen said in her q and a in recent speeches she is sounding , increasingly confident and i think that is because the labor market is doing well in the u.s., the consumer is healthy, financial conditions are easy, and the global economy is doing better than a lot of people expected. this is giving the fed confidence that they can take a step back from this large balance sheet support. i think the market has mispriced the fact that the fed will go a little faster than most expect. right now the market for , december is priced at about 60% and really cumulatively until the end of next year, less than two rate hikes. our view is that you are going to see a little more aggressive fed versus what markets are expecting. and therefore, the trend to higher rates is likely and we will likely see the fed move and

also other central banks over time start to step away from the support for markets. tom: i want to bring this in, published on friday. it really pushes against the fed certitude. the market is greatly overestimating the votes and the commitment to hiking at the fomc, and then he turns within his research note and says the next inflation print has to deliver the bounceback to normal inflation. how urgent is it within the fed linkage into the real yield market to finally see actual inflation data, as mark mentions? jim: i think there is a lot of long-term secular headwinds to sustainable inflation. i do think inflation is definitely picking up and i agree with mark's point. you're at a point in time where it makes a lot of sense and gives the fed confidence with regards to where we are, the underlying economy, the labor markets, that they can reduce their balance sheet.

that being said, there is a lot of aggregate debt in the system that is still going to put long-term headwind on to inflation. i think it will still be an outline by the fed, they will reduce their balance sheet and hike, but at a moderate pace relative to the underlying economy. tom: this is an incredibly important chart. i am looking at the ferro bloomberg terminal to make us wiser, and i want to go to all three of you. i usually don't do that, but it is so important into the fourth quarter. this is the inflation-adjusted fed fund yield. stan fischer in the lower right corner, looks at an altar accommodative fed that will weigh down on the euro mark. -- on the zero mark. if chairman shows up tomorrow, where are we in the continuum altar -- altra accommodative to normal?

rachel: still relatively stable. we will be normalizing and there is a temptation to continue to tighten, the recognition we are loose even though inflation is not quite present. i actually agree with my two co-panelists. tom: we have to stop the show, they all agree. we don't do that at bloomberg. let me go to you, mark. this ised further that a fed that will lead the market forward. where are we within the rates, even on the edge of normal. can i daresay it is 2019? mark: i think we are headed from zero to .5 percent, but this is really striking and brings up an interesting point. if you look at developed markets in the u.s., europe, japan, you have negative real yields out to

10 years in the case of u.k., europe and japan. and this is in sharp contrast to what is happening in emerging markets where inflation is actually falling in some countries. their central banks are lowering rates. you have central-bank detergents between some in emerging markets and most of the developed world. our view is you want to be more cautious on developed market interest rate exposure and if you are going to take interest-rate exposure today, have it more in floating-rate form as well as select exposure. tom: we are going to talk about floating rate issues coming up. i want to bring up the screen right now to give you an example of where mr. kissel talking about europe is different. bring the camera in here to the upper right corner, if that is possible. you have negative yields in switzerland, two year, three-year, four-year, seven-year, nine year, 10 year. and we used to have negative -- thatut to the 0.366

is how artificial the market is and does it suggest a fed more normal than anyone else? jim: good we are entering a new point. phase here post the financial crisis. we had a cycle where everything in the sense that correlated to one and the central bank and fiscal response came at the same time. we have gotten to a point where economies are in different places and there are different levels of cyclicality in different regions. bankse seeing central acting more regional as opposed to coordinated effort around this. i think you will continue to see volatility below. that said, i think you will still see dispersion being high. whether different industries or regions around the world, as they balance the cycle. but i do think in a longer period of time where you will have low rates and normal still means low. tom: we heard this week clearly

the idea of central banks in different locations in the cycle is key. rachel, i look at the real yield, the inflation the nominal , yield, where does goldman sachs think that dynamic is going? where is the real yield nominal yield dynamic going to work out over the next 12 months? all in 20 seconds, can you do it? rachel: we think they begin to compress against each other. both nominal yields will continue to rise, but we will continue to see some inflation coming through. we are believers that there were temporary inflation factors pushing inflation down that will be coming back into the market early next year. while we believe there is going to be a lower terminal rate towards the end of this cycle, there is upward room. we are short u.s. while or -- while relatively more positive in europe. tom: we will talk about that. i know everyone wants to jump in. a nice opening section on real

yield. we will continue. coming up, the auction block. mcdonald may head to the debt markets in canada. stay with us, this is "bloomberg, real yield." ♪

♪ tom: you expected jonathan ferro. i am tom keene and this is "bloomberg: real yield." want to head to the auction block. always interesting. canada, mcdonald priced $800

million of bonds. the maple bond market -- the maple leafs bond market on track to be the busiest since the financial crisis. meanwhile in the middle east and , saudi arabia, they raised 12.5 billion from a second dollar bonds sale this year as the kingdom bolsters its finances .mid the economic overhaul there is much about that this week. and the u.s. yield for a note sell hit the highest level since october 2008. mark, let me begin with you on the appetite for paper. real yield is not only about the strategy and economics, but the demand for paper. is it a frenzy yet? i mean if yields are going to go , up, and mr. kissel is going to up, us yields are going

what is the appetite for paper right now? mark: the demand for high-quality income assets is huge in the world, and simply put, it is overwhelmed by the supply. even though you have had a trillion dollars of investment grade corporate bond issuance year to date, it has been met with significant demand and credit spreads have tightened throughout this year, what you will see going forward is more rage -- range bound spreads. i don't think you will see tighter spreads going forward but most investors have underestimated how strong these technicals are. the demand for income in the world. central banks at the margin will gradually normalize and that can cause technicals to change at the margin but right now , these technicals are very strong. tom: years ago, i heard sir john templeton say quietly in a meeting with that beautiful tennessee accent there will be , shortage of paper. that is where we are.

explain to an audience who hasn't read, explain why there is a shortage of paper. where is the animal spirit from i've got to load the boat on fixed it in paper? jim: i think honestly, the equity market, as well. we are in a different environment. if you went back 10 years ago, and you wanted to be conservative, you can cash and still are in fighter percent -- 5% to 6%. around the world, if you are going to own fixed income assets, you will own something that is below your long-term retirement goal. so, we do see a demand for high-quality assets, but that is also because you have an improving economic environment that has been buoyed by fiscal and monetary stimulus around the world. asset prices have risen, but the risk profile still looks pretty good relative to the underlying environment. tom: rachel -- and all of you are sort of from the same idea

that i don't want to lose money. i want to make a coupon and find total return. high-yield has had a wonderful run. are you more high-yieldy, are you on moderately speaking terms with your corporate desk at goldman sachs, or are you high-yield all the time? rachel: we are actually pretty cautious on high-yield right now, although we don't see the end of the cycle anytime soon. we think valuations are pretty tight given there are increasing pockets of risk in the market and also the view that as financial conditions tightening in 2018, you'll see a steepening of the quality curve. tom: let's do this. this is important. ferro can't do this, i can. put your hands up like this to describe it. full faith and credit down here, this is their yield. rachel you are watching , high-yield coming in, tight. but then they both move. what happens to high-yield if janet yellen's inflation becomes less than transitory? do they go up together? how does that dynamic work? rachel: historically high-yield has had an inverse relationship

with treasuries. that is usually because rates are rising when the economy is strong. the economy has already been strong, and spreads are tight, so there is not a lot of room for spreads to go. and furthermore, we think that rising rates is going to tighten financial conditions, so we think spreads are likely to leak wider. not taking away the total return of the asset class, but slimming it. tom: mark, i know everybody at pimco eats kale and you haven't been to mcdonald's in three years or something. help me -- we saw the mcdonald's auction deal. when a aaa blue-chip corporate like mcdonald's comes down, how does that deal get done? how do you get the paper you want? mark: well, tom -- and i haven't eaten fast food in 10 years, so probably not be biggest mcdonald's fan out there. obviously, investors are out there competing for supply. what is happening right now is the issuer has the advantage

because the financial conditions , are so easy. many of these corporate bond deals are being met with incredibly strong demand, two or three or four times oversubscribed. so what we are doing is being a lot more selective. we talked about high-yield earlier. we also have reduced risk in high-yield simply because of the valuation argument. we are being more selective. we are owning more senior parts of the capital structure. we are not buying as many new issues as we were six months ago. we are owning more investment grade, less high-yield. we still like non-agencies as well a lot. we like the u.s. housing market. also emerging markets on a relative basis to us look quite attractive. tom: jim keenan, ration goldberg, mark kistler, we still have the final spread. let's continue with this discussion. stay with us here in this is "bloomberg: real yield.

♪ tom: i am tom keene in for jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up over the next week, chair yellen will be speaking, a very important speech this week, in barcelona, the regional government holds a referendum. we had a great report on that this week. a really great tension there. prime minister may headlines a conservative conference. in the united states, we stagger forward to the friday jobs report as well. i want to go deeper, or as deep as i can with my brain. jim keenan of blackrock, rachel golder of goldman sachs, and mark kiesel at pimco. rachel, i really want you to

give us some wisdom here. there was a great article on the frenzy in your world of loans. institutions buy loans. rachel: loans are seen as a higher-quality high-yield opportunity set, within fixed income and basically a safer way of getting yield. there has been a massive issuance in the last few years, but most of it has been refinancing oriented, a lot of it absorbed by clo's, which are doing very well. tom: what is a clo. rachel: collateralized loan obligation, it -- tom: jonathan ferro would not have done that, what is clo? rachel: collateralized loan obligations. the bank loans have a floating rate. tom: is it a floating rate? rachel the bank loans have a : floating rate. tom: we have jim keenan. explain floating-rate versus fixed-rate, and why you need to float now as you go into 2018? jim: it is around the duration

risk or interest rate sensitivity. obviously fixed income has a , variability of rate risk associated to it. riskloans give you credit -- senior secured credit risk that are tied to the front end relative to what you would get in fixed income. i do think it is important -- the bank loans, the secured market is giving you a good risk-adjusted return profile. one of the things we did talk about before was the volatility has been low. but dispersion has still been high. whether you are looking at loans are high-yield or emerging markets, the underlying economy at low growth, there is still huge divergence between winners and losers. i think that is -- an important part whether you are looking at high yields or loans in having a balanced credit portfolio. tom: what is important here is the exogenous shock. ,s chairman war should -- warsh

chairman taylor, chairman hubbard, can they be an exogenous shock to the certitude of the floating-rate market? mark: i think they can. i think under bernanke and yellen we have had a robust environment. for financial assets. you have seen not only bonds do well, but equities do well. i think the challenge is going to be because the global economy is doing decently and because it is likely you will see inflation in developed markets gradually pick up, the ability of central banks to provide that tailwind for financial markets, i don't think it is going to be as robust as it has in the past. and by the way, that is independent of the new chair. but the new chair is going to create a potential volatility for markets. so, it is something i think that is going to be a headwind for asset prices going forward. tom: jim, i want to go to you with the last question. the non-sophisticates out there say yield higher, price lower. is anyone looking for an almost bear market in bonds? is there anybody out there talking about price down where

it is painful? jim: i'm sure there are some people looking out there. i think we are all getting use to the sense that there is a lot of debt in the system. it is just that the corporate level, the central bank is starting to remove that from the system. couple that with technology, demographics, i think there is a longer term trend of downward growth and inflation. tom: this has been to smart for surveillance. jonathan ferro looking to do this each and every week. my thanks to jim keenan, rachel golder, and mark kiesel. from new york, that does it for us. we will see you friday at 12:00 new york time. 5:00 p.m. in london. this is "bloomberg: real yield." ♪

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