>> i am jonathan with 30 minutes of fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, the federal reserve losing conviction in 2018. europe's economy moving but bond yields refuse decline. a route in the chinese bond market as china continues its leveraging push. we begin with a big issue, the treasury curve. >> to me, what is really troubling is how fast the curve has flattened after a few weeks. >> the yield curve almost always flat ends when they put rates up. i think what has caused people

to stop and take note is the speed with which it has flattened. >> you still have lots of central bank liquidity, even if the u.s. bank is falling back, bank of japan is expanding their programs. ecb is really involved. you not seeing global central bank for dissing winding down. >> between 50 and zero, it is really the flashing side. things are starting to get a lot more challenging. above 50 you can always explain it away. >> equity is doing well, credit spread is doing well, the economy doing well globally, i think there will be some willingness to look back -- look past the flatness of the curve. jonathan: joining me is bloomberg news and bloomberg radio coming to us from atlanta. joining us, allen higgins from london. i want to begin with you, lisa. but's go to the chart i have been talking about for weeks and weeks and weeks and weeks.

pick your place on the curve. how much signal, i always start with this, how much signal is in that? lisa: a lot of people will say this time is different and it does not indicate a slowing of the economy. as cameron said, this is pretty typical. as bloomberg intelligence noted, this is pricing any policy error. right now, what this is saying is the long-term economy is not accelerating. end of story. the more the fed hikes, the more it will slow that down in the more you will see flattening continue. that is not a bullish sign for the economy long-term. jonathan: is that what you see in 58 basis points, or do you see something different? >> it is a different situation

when it comes to the yield curve. it is driven by growth. growth is super strong. new york said it is likely to come in 3.8%. it is really being driven by inflation, which is mia. that is keeping along and contained in the short end up rising. lisa: my issue is, people conflate inflation and growth. at what point are they synonymous? there is a question of, can we have the sustained growth without inflation? i don't know if the answer is, but it seems like something is amiss. jonathan: there are already too contentious points. the treasury at a two-year. look at this aggressive widening we have seen throughout the year so far. we are north of 240 basis points on a two-year spread. i have been asking if there is

oxygen left? can the fed continue governor loans? lisa: normally when you have the u.s. tightening, or one central bank tightening and another does not, you have people go into the dollar or the currency of the banks that are tightening. if that is not happening, you are not have the stronger dollar as the headwind. the fed can keep hiking, it will not necessarily d balance the economy, even if eurozone keeps up with its policies. jonathan: i do want to turn to allen higgins. it is always great to catch up with you. it has been far too long for you and i. we have been talking about the front end of the yield curve. first is to year and the u.s.

treasury to year. it is north of 240 basis points. my question is whether the federal reserve can continue and whether it will continue to get wider? >> nice to talk to you. we think it will continue to go wider. for six income investors who don't want to take currency risks, they don't want to capture that spread. if you hedge it out with three months money you will be paying circa, 150-160. you don't capture all of that spread. from a fixed income it is less wide. the fed is tightening and the ecb are holding nothing until the third quarter. jonathan: in 2017, everything has gone right that you would hope to go right in europe. the equity market has not done much, but the data is looking really good. the ecb has remained on hold. the economy has picked up, the confidence numbers are great. yields have gone nowhere. it is the same in the u.s. as well. why are we here with treasury of around 235, with the data where it is right now?

alan: if you came down from mars and looked at this european data, you might think, maybe short rates are -- but they are not because european is very strong. there is higher unemployment rates here in europe compared to the united states. put simply, it is the magnetism of where cash rates are. with cash rates in euro negatives, that is pulling down the whole curve. i think the u.s. is an even more interesting question. why is the u.s. tends and 30's so resilient? having it traded all my career, one of the hardest things to get right in fixed income is the 10 year treasury. when you think you get it right, the formality is discounted. if you like the 10 year treasury, they know that the fed look at the two and two and a quarter and they are done. we do not see much higher at

tens or 30's. imf saying it is a fantastic investment, but the 10 year and 30 year knows, that is what we would say. lisa: i love the idea of martians coming down and looking at european data and deciding what is happening. i would be very confused on many fronts. i would say europe is dealing with what the u.s. is dealing with not so long ago. it is a goldilocks scenario, just to use the jargon of the time. growth is accelerating but it is not that great. you're not seen that much wage presser. the ecb is continuing. jonathan: typically with rates as low as they are and yields, you have a decision. you go further along the curve, or you go further along the risk curve, which means, lowering quality. in europe, that will be really

difficult to do. high-yield already trades so tight. if you wanted exposure to this positive story in europe on a fixed income side, how are you going to express yourself? robert: european credit is much tighter at 4.3%. the ecb is still doing qe. the fed is still -- the growth is still good in europe and in the u.s. we think that should be supported for credit overall. one of the things we are concerned about is if we got the u.s. yield curve to a flat, to be completely flat. that is typically the way that you would get some sort of disruption in markets. a 10 year we are at 120 basis points in the u.s., that is a level where we still have quite a ways to go before we get to a flat curve. in our mind, that means that a big disruption credit is unlikely in the near term. certainly, you start out by see it -- by saying yields are tight and they are. jonathan: how would you express

that positive view of europe? what is the most effective way of expressing that in europe? alan: you have to be selective. within peripheral debt. portugal has come a long way. portugal, spain, italy. portugal is at the full investment grade rating very soon. fundamentals look good there. 10 year yield under 2%. not high, but it is a government wants. there is some interesting portugal bonds in dollars. staying with euro land, it is different from u.s. height yield. it is a much higher rated market. there is a natural difference there. where are we investing? subordinated financial credit, performs well but there is still a premium. just very selective. over here we have an interesting hybrid market. for example, one of the issues we have in the portfolios that

we disclosed? it would be volkswagen tenure subordinated debt. that yields circa 3%. not super high, but in the context of where cash is, saw that devalue. jonathan: coco is about a great year already. would you could 2-d to buy -- would you continue to buy cocos? what are you looking to get from that specific trade? alan: cocos are falling to the flow yields. it is an excessive subordinated corporate bonds that we have over here with the newer market over here in europe. we carefully chart the spread of cocoas, this is high-yield, this is highbred, you need to stick with national champion banks or

you could get called out. but you are being compensated for the memory of 2008, 2000 nine and 2012, there is still compensation there. jonathan: they will be sticking with us. coming up, bond sells raised against the u.s. congress. that story is coming up next. this is "bloomberg real yield." ♪

♪ jonathan: this is "bloomberg real yield." state and local u.s. governments are rushing to borrow before congress and ask tax legislation.

the amount of sales scheduled for money bonds will swelled to more than 22 billion dollars. the most since october 2016. elsewhere, over and africa, nigeria raised $3 billion. the offering was the biggest bond ever. the nation split the offering equally between the issue receiving $11 billion worth of bids. company sought billions of new bonds. they might want to set the lowest on the riskiest debt thing. investors wanted seven times as much as was offered. that was the discussion we had previously. still with us now, lisa from bloomberg. and alan higgins. another big story throughout

this week has been china and its aggressive spread widening we have seen through the week. chinese corporate bond yield, that premium is the highest since june of the sovereigns. how significant is this blowing out of the spread at the moment? lisa: a lot of people think it is quite healthy and that it means that the government is going to allow companies to face serious pressure. we got defaults in china. should it happen it would allow a healthier market. the flipside is, the defaults and financing costs become onerous. there is a very narrow space in between those two scenarios of which are two completely different outcomes. jonathan: the situation in china, as leveraging continues, what strikes me is how isolated this appears to be. it has not led through to develop markets. it has not blitz route to emi. are you surprised by that -- lead through to emi. are you surprised by that?

robert: no, since they put them in place since last year. what we saw is large month closeout and china, which had an impact of connecting the capital markets between the u.s. with global markets and china. now those capital controls are tight. and our view, there is not much leakage, which is isolating the chinese market. jonathan: i was looking at catalonia bonds. i bring this up because throughout 2017 you have been paid really well to take risks. this is catalonia as the political crisis really took off with yields north of 3%. now it is south that 2%. your experience so far this year, has that been the lesson so far? when you see a risk, tick the

other side of the trade, even if you have to look silly for a bit? alan: generally, we have that part of our philosophy. we tend to buy into geopolitical risks. we still got russian dollar bonds in our portfolio that we bought in 2015. they turned out to be spectacularly good investments. he has it exactly right, this is healthy. the authorities know their number one problem is eight buildup in debt of gdp, that is mainly in the corporate sector. they were very successful with their intervention in the currency. everyone thought it would collapse this year, it did not. we suspect the market should give them a bit more credit. by the way, until recently, this spread widening was correlated with losing u.s. high yields and investment grades. they beat this is going to slap back next week. let's have a look. jonathan: something i think people would push back on is the much weaker dollar that has stabilized the currency. they have pushed through the deleveraging campaign. every time there is pain, they back off. why is this time different?

alan: that is a fair point. i would say that the chinese story is more than the fact that -- because of u.s. dollars weakening off in the less of the half or year and chinese one has been strong -- chinese won has been strong all year. if they see signs of distressing, back away. that to gdp has finally fallen for the first time, well, since i have seen it. it assigns that they are moving in the right direction. jonathan: i just want to get your thoughts. with this happening in china, you said it is well contained at the moment. you see anything that would push it to take additional risks in the end with this happening in the background? robert: good growth in the core markets is good for em. china is committed to this one belt, one road program, which is a massive investment, which is positive. all of those are positives for em.

they are tailwinds for em. we would look for em to do relatively well, to come to your geopolitical risk question, we think what is driving markets is growth and inflation. if geopolitical risks do not impact one of those three, they are to be bought on the selloff. i think that is what you saw in catalonia. it did not affect growth, inflation or financial conditions, so you buy. things have been true in a number of different political corrections this year. lisa: i think emerging markets have been in a sweet spot. it remains to be seen if they will be immune to pick -- immune to pull back in developed markets. i think people are discounting

the potential risks. not to say it is not a good investment, but this is a sweet spot. perhaps ignoring some fundamental issues. jonathan: bloomberg's lisa with a subtle dig. lisa: no, it has been an amazing run. jonathan: alan higgins will stay with us as well. i want to get a check at bonds. the picture really, to year yield up. on the front end, 30 year yields down by two basis points at the long end. it is a flatter yield curve. 1.74 on two years. jay powell prefer the senate thinking committee and a fed confirmation hearing. that and a little bit more. this is "bloomberg real yield." ♪

♪ jonathan: this is "bloomberg real yield." time for the final spread coming

up over the next week trade outside of cyber monday, the u.s. congress gets ready to work on that tax over hill. hill the effort continues -- over bill -- over hill hill. the effort continues. jay powell will go before a hearing committee. janet yelling testifies in congress. you have the bank of financial stability report and the opec meetings. bloomberg's lisa, robert, and alan higgins. i want to bring up what has turned out to be one of the biggest nonstory so far this year. that was the concerns around the composition of the federal reserve. the chair pick has been quite consensus. names around the vice chair very much in a similar vein. is it something you need to worry about going into 2018? alan: wary i think is pushing it. i think it looks like it will be more hawkish judging by some of the names in the frame coming through.

i would add -- i would be very interested to see if they continue to emphasize financial conditions. if you look at fed tightening, it is not about inflation as we know, as janet yellen said herself, it is a big puzzle with low inflation. it is about growth. i think it is about financial conditions. i know it was heavily influential about the goldman sachs indicator. you have seen that mentioned in quite a few minutes or statements from people at the fed. i would feet -- i would be very interested to see if that continues next year. if it does not, maybe we will not see as many wage increases

as expected. i think it is not just bill dudley, but they are focused on tight credit spreads, weak dollar. jonathan: what are we looking for from jay powell next week? lisa: i think it should be easy. i will avoid saying anything to controversial. the most interesting thing is that president trump's entire group is really counting on the fed to allow growth to pick up enough to make their tax plan work. you have to have a fed that is on board. yet, the hawkishness that people are expecting from this fed would go against that. there is a huge dissonance here. it is hard to swear with a conservative idea the fed with the needs for a very dovish fed for this whole thing to work for president trump. jonathan: we will wrap things up with rapid fire. three questions, really short answers. you are all in your boxes. 2018, flatter or steeper. lisa: flatter. robert: flatter. alan: flatter. jonathan: the u.s. to your spread, wider or narrower? lisa: narrowerr. robert: wider. alan: wider. jonathan: chinese bond routes

contained or get ready for the pain ? lisa: contained because they have a lot of money. robert: contained. alan: contained, you have to find more difficult questions. jonathan: i have nothing left to throw at you. great to have you with us on the program. my special thanks to bloomberg's lisa, robert from fixed income and alan higgins. that does it for us from new york or it we will see you next friday at 12:30 new york time, 5:30 london. this was "bloomberg real yield." ♪

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