♪ lisa: with 30 minutes dedicated to fixed income. this is bloomberg real yield. ♪ lisa: coming up, what will be the pin that pops the bond market. perhaps it will be the central banks as ecb firms up its plans to taper. focusing on the risk to financial stability. the largest u.s. banks report earnings and revealing a less credit where the american consumer. how big of a concern is that for debt markets?

we start with a big issue, markets continue to shrug off risk. >> it is really surprising when you look at all the events that have gone on in the market becomes so jaded. they don't react like they used to. >> i am nervous. it seems like when investors are nervous they are prone to being spooked. nothing seems to speak the market. >> central banks are keeping the peddal too much on the gas and we are sucking out volatility that is not conducive to long-term growth. >> i just think there is a disaster risk the markets are not taking into account. lisa: lots of existential angst. joining me in new york is michael cloherty. bonnie wongtrakool, portfolio manager at western asset management and scott kimball,

-- i wouldanager at start with the ecb. we did get news overnight giving more details about what their plan might look like next year. is --truck by the fact it the market rally. people bought on the idea of them buying fewer bonds. >> bcb bancorp will he finished tapering around the second half of next year. that's why i think he saw them rally. we are not surprised by that. we came into the year feeling constructive on the eu. we felt it was underpriced. and now we have seen them recover quite well. inflation is ok. still not on target. we actually think growth is going to decelerate a little

bit. we don't think is going to reach the forecast. growth could be even less than 1.5%. as a result we think ecb will have to remain in the market actively buying and doing qe for longer than the market expects. the european central bank continuing its bond purchase longer than it is currently pricing to the market. michael, given that backdrop nothing because u.s. treasuries to sell off? michael: that is the problem. every time rates go up, we look really cute other countries. foreign buying has picked up and come much further out of the curve than it used to. a lot of private investors were used to two-year and five-year treasuries. to get a really big move in the market what we really need is inflation to pick up a little bit. one is the obvious.

my cash flow is worth less if inflation is up. we have last few years seen these people piling and risk assets in order to retain yield target. i can't afford to keep my house off of wind a treasury yield. double not generate enough cash flow. i have two piles into risk assets to take more risk. when rates start to rise people start the pullout of this risk assets and they can hit the yield buggy and a safer way -- bogie in a safer way. we see some jitters in corporate bond markets. and the fed suddenly says wait a minute, let me back off a little bit. we rally right back to where we were. that will continue to happen as long as inflation is low. what happens if we start to see inflation pick up? the fed cannot have a foot there for risk assets and you have the potential to jump to a much higher yield. lisa: you think that is

possible/ -- possible? michael: not soon. not a dramatic jump. lisa: scott, are you piling into 30 year bonds? scott: the way we position the fund is to take advantage of what my colleague was talking about. as interest rates rise we see some trepidation of people that have owned this risk assets may be rotate back into more traditional asset allocation tools like core fixed income. part of that is owning longer dated securities. please god owning corporate debt in sectors -- we found owning corporate debt and sectors -- we have been terming out a bit. with the expectation the upside case for rates is continuing to dwindle with lower inflation. lisa: i'm struck by the fact we are not seeing that much inflation. we are not seeing that much growth.

people are piling into risky stuff. people are starting to get nervous. the imf talks about financial stability in and you have the yield curve that continues to flatten, suggesting growth will only slow down further in the future. at what point does this make you very concerned about the financial stability we are looking at if there is a downturn or a risk? bonnie: i think the yield curve is not by the flattening suggesting it will have a greater chance of a recession. mikein part with what was talking about. the level of yields absolute is low. people have to go up the curve. i think you see the curve flattening because we are seeing a little more inflation. there is a little bit more chance of the fed having to hike and going ahead with her normalization. that is why you are seeing the yield curve flattening. it is not inverted. i don't know how many people

leave the flattening is pretending a recession. lisa: do you think the curve will turn in the near term? michael: if the fed starts to type more aggressively we think the koeppel stephen a little bit going forward. relative toteepen the curve. perfectly flat. we really need to have an imminent recession. if you look at consumer balance sheets, they are extraordinarily strong. consumer spending should hold up even if we had a little shocked it. today we saw a solid report on the consumer side. with that, the biggest piece of gdp, we had decent growth going forward. yeah, no recession sing. scott: we would agree. we look at the underpinnings of what is going on with the yield curve. it is emblematic of a disagreement. we think the investor community is having given the fed. we use the word "transitory"

since about 2013. the market is interpreting that. particularly some of the comments from the fed governors about a particular word. there is a bit of wrangling going on with exactly how much longer we are going to wait before transitory is removed and the word "structural" comes in. it reflects the market for telling to the fat there is certainly structural underpinnings. gdp in the u.s., it has been very strong. we think it was probably an upside case to be made for inflation to accelerate in the next 12 months. lisa: who matters more? bonnie: when you talk about quantitative easing, the ecb. the fed already communicated what they will do. they have been transparent about it. he will be very gradual. there is not a lot of room around to have movement. lisa: how many hikes that we see from the fed next year? michael: we will get sort of a

quarterly days going forward ba -- base going forward. we will see three or four. inflation isen of below where they would like it to be, that is the norm. inflation is only about 2% about a quarter of a time going back 25 years. you still need to take some insurance out, moving back towards a more normal policy rat. if you wait for inflation, it is too late. it causes much more inflation with the rapid tightening. everyone is piled in a more risk. markets seem less liquid. people have more risk on the used to because of the lack of volatility. if the fed does something hard -- lisa: we will talk about that inflation. everyone is taking with us. michael cloherty, bonnie wongtrakool, and scott kimball.

coming up, the auction block. it battles against amazon. this is "bloomberg real yield." ♪

♪ ♪ lisa: i am lisa abramowicz. this is "bloomberg real yield." this week the u.s. treasuries sold nearly $190 billion in bonds. we are focusing on the 30 year bond sale. 2.53, theer ratio of highest level since september 2015. walmart sold bonds to refinance debt.

the world's largest retailer issued $6 billion of unsecured bonds with the lowest portion, a 30 year security yielding 75 basis points. john frieda companies are results 14 ilion dollars -- $14 billion this month. it is very likely it will had a five-year peak for sales. with us, michael cloherty, bonnie wongtrakool and scott kimball. i am struck by what you all are saying to me and what we hear again and again. you just don't see the risk. people will continue to buy bonds. we saw the biggest weekly inflow over the past week since 2015. it makes me wonder why not lever up? for your money into absolutely anything risky you can find. michael: sadly i think we have

seen people doing that. unfortunately is the people out of the most stress. retirees they need some income. other people like that were at least able to sustain the loss. pension funds, other funds. lisa: are you seeing pension up?s letter up -- lever michael: it is really corporates, things like that. you are forced to chase yield because you have to meet some target. you have to pay retirees. you have to meet earnings targets. began do that buying treasuries so you are forced to buy out the scale. lisa: are you more willing to use leverage? fund, itr our bond does not use leverage as a tool. we move around between 80% investment great securities with the opportunity to do with the 20% below investment-grade. the opposite of the trade you

have outlined. we are more willing to move further out the yield curve and investment-grade to capture yield as opposed to trying to stay low and by high-yield at a low high-yield premium. think theret is we are better opportunities ahead look at some of these risk assets. right now we are more on the investment-grade side of things. bonnie: similarly we don't use leverage in our core plus funds. in terms of valuations, we think the valuations are relatively full for credit. but we have done is cycled out of some of that and been very selective about where we have those holdings and then into other markets we think of more values like emerging markets. lisa: i want to pick up on emerging markets in a minute. scott and bonnie, the easy investors engaging in behaviors that concern you as far as how much leverage they are taking on? borrowing short-term in order to invest longer-term, as well as

more than they would like to? scott: i think this is sort of the corporate bond or credit bull market that is the most hated in history. people have been trying to predict its demise since the day it started. when we look back at our own expectations for credit risks and returns, they continue to surprise to the upside. we don't think the risk premium is high enough to own super structures and take on too much risk. borrowing to for the risk out the curve. at the same time there are a lot of investors engaged in that. that is one of the concerns we have about when this credit cycle ends, when the cushion pops. it may be more pronounced. bonnie: we have seen investors in this search for yield as printf impressed in certain actors moving or allocations to other sectors. i would not characterize it as over-levering. lisa: people talk about the amount of cash. the flipside is that are not

enough bonds for people to buy. you are seeing synthetic cbo's coming back in people creating contracts to go around risky bank bonds in europe. is this natural? is this still to small potato stuff? is this becoming a more prevalent issue as people search for something to buy? >> systemic risk, no? --are not close to anywhere to that amount outstandings yet. we have seen looser language on some corporate bonds. less security. people stress for yield and they have to give up something. you are seeing a little bit of a slide. overall the economic backdrop still is bright enough you will not expect a massive wave of defaults coming in that would really hurt corporates. what worries me most about corporates is this huge move

towards passive investing. if we get a surprise default from somebody, our panelists know how to handle that. they know how to handle that security. they can work their way out of that. some of the passive folks, i sell it, i move on. bigger,ts bigger and the risk of a surprising fall -- it was before your days, but if we get that, it will be much messier . lisa: you are going into more investment-grade and high-yield debt. investment-grade is also highly valued. bonnie: we are going into more emerging markets. lisa: you are going into investment great, right? scott: in the market we are can to doing to see strong flows. i have to echo michael's sentiment about passive versus active. core plus is an active find. -- fund.

lisa: everyone is going to be sticking with us. we will delve into the emerging markets. michael cloherty, bonnie .ongtrakool, scott kimball let's get a market check on where bond said in this week. all getting tighter. people piling into bonds cannot get enough of them. the final spread. the weekend features the 19th chinese communist party congress. it only occurs twice a decade. this is bloomberg real yield. ♪

♪ lisa: i am lisa abramowicz. "bloomberg real yield this is"bloomberg real yield." --this is "bloomberg real yield." fed chair janet yellen takes

part of a group of 30 international banking seminar. catalonia faces a deadline regarding its independence. alexis tsipras is at the white house. goldman sachs reports earnings, and china holds is 19 party congress, the country's most important political event. still with us is michael cloherty, bonnie wongtrakool, and scott kimball. i want to talk more about what you are talking about with respect to shifting away from high-yield credit in the u.s. moving more to emerging markets. how are you doing that? recently increasing number of firms are putting more money into local currency, debt, and away from dollar-denominated emerging-market debt. bonnie: we did start to move into that earlier at the beginning of the year, got that was a good value. since then spreads have compressed, particularly on the dollar denominated debt.

we do have a decent allocation. i would say of his are following, but it has more room to go. if you look at the differential and real yields between developed and emerging market economies, we think it still holds value. lisa: are you shifting more of your portfolio into emerging markets? scott: we have not shifted our eme plus strategies into .we're emphasizing looking for opportunities in em corporate. the company is domiciled in emerging-market. lisa: how concerned that this is bet?eraged dollar that? -- as soon as the dollar strengthens people get a rude awakening? is dol: some of the bet you think the fed will tighten hard and fast? if you get aggressive tightening, that is probably not

going to work out too well. it is unlikely we will get an aggressive fed. we have had this gap. -- with some of the new fed chair potentials coming in, you will probably see a narrowing of the gap. i don't think you will see wild actual differences in policy by the different fed potential chairs, but we will see a change in of the market reacts. lisa: are there any country you are avoiding? bonnie: we're definitely selective. emerging markets is not a monolith. you need to have an active manager to go through that. you don't want to have passive exposure. different countries have different risks. there is geopolitical risk across the entire world, little of emerging markets. in terms of credit we like, we do like argentina, brazil, india and indonesia. some of that is based on the

risk to china for example. china, we are confident china can continue to decelerate growth, but we are cognizant about in the step really rocking the market -- about a misstep rocking the market. lisa: this is the period where we do rapidfire. you guys are supposed answer quickly. one word answers. you think it is likely we will see recession in the u.s. in the next 18 months? michael: no. bonnie: no. scott: no. lisa: what is riskier, u.s. treasuries or emerging-market debt? michael: em. scott: em. lisa: which is more prone for losses, german or u.s. government bonds? michael: u.s.. bonnie: u.s. scott: german. lisa: what is more overvalued? scott: high-yield. bonnie: high-yield. michael: high-yield. lisa: think you so much michael

cloherty, bonnie wongtrakool and scott kimball. minutesp in just a few we will have full coverage of president trump's remarks regarding his decision on iran. we will continue to cover the bond market which is the broadest, biggest market. we will see you next friday at 12:00 new york time, 5:00 p.m. in london. jonathan ferro will be back in the seat. this is "bloomberg real yield." ♪ who knew that phones would start doing everything?

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♪ storieshere are the top around the world that we are following. we are just moments away from a major speech by president trump. the president expected to disavow the iran nuclear deal. not abandon it entirely. what it means for the level alliance ahead. -- global alliance ahead. president trump it's a bold move to cut up subsidies to ensure that insurers -- subsidies to insurers. third-quarter bank earnings continue to roll in. bank of america posting the best profit in six years. wells fargo hit by a surprise markets charge. we will cover it all the top banking analyst. shery: let's get a