s! yes, indeed. amazing speed, coverage and control. all with an xfi gateway. find your awesome, and change the way you wifi. jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated the fixed income. this is "bloomberg real yield." ♪ jonathan: the president signs the tax bill and the treasury curve stevens. risk assets outperform a 2017. junk bonds get left behind. in europe, the year just the way we started it, worrying about politics. we begin with the big issue, the

yield curve beginning to stephen. -- stephen. -- steepen. >> they will be less foreign participation for treasuries. when you add in the $700 billion next year, we think that the rest of your -- recipe for a steeper curve. >> is unlikely the curve ends steeper than it is currently? unlessunlikely the fed starts the ease. very unlikely scenario. >> very much likely contining to flatten. inflation maybe ticks up a little bit. the yield curve continues to flatten. critically, it does not invert. >> i'm worried about it, too. i think we need a watch it. she 10-year treasury, high 230' is meaningful. the history of inversions is such that it is tending to be a

reliable forward indicator of recession. >> whatever you think about the way the world is supposed to work, it does not work that way in the last two weeks of the year. i think it's a function of very strong equity markets. if they were to correct, they would go back down. i want to see them stay there after the first of the year. jonathan: joining me in new york george greg peters , goncalves plus, matt toms. thank you very much for giving us your time. i know you were trying to run out and get away for the holidays. let's begin with the statement we have seen throughout the week. monday, tuesday, wednesday was looking aggressive. just some year-end windowdressing? that therket realized president passed the tax bill in the law. i think it will be more supply next year. they had this prevailing fundamental view, but now we

will have more supply and the fed is still unwinding the balance sheet. greg: i think it is a little overdone. this is a recalibrating. i think that these thesis holds. the flattener. holds going into 2018 jonathan: i can't figure many people think it will go the other way. greg: i see the consensus flipping around depending on how the curve moves. jonathan: of christ sets narrative? -- price sets narrative? greg: you are having potential he a lot of bonds hit the market and that could change the price. jonathan: matt? matt: ultimately the dollar weakness has allowed this flatness. it's important to 10% decline in the dollar has allowed the fed to push expectations of two 2.25. that flattened the curve.

growth could push the backend next year. jonathan: just to bring the dollar dynamics and the next year, i was looking at the forecast for g10 and could not believe how you did the forecasted price action is for euro-dollar. some people think it will be a nothing year for g-10. do you share that view? matt: it was voll is dead, long live voll. it is unlikely to be that muted. you have central banks in diametrically opposed positions. the ecb and japan are heading in the opposite direction. something is likely to break. we don't think those forecasts. will hold we would be biased towards a stronger dollar. jonathan: let's talk about was going to break. this spread between treasuries and bunds is getting wider and wider.

we are pushing to 60 on the front and just the other week -- 260 on the front end. where are we going here? greg: both are critical. the front end of the bund curve is way too low. i think it works in 2018 finally . at the same time in the u.s. i don't think enough is priced in. both have to move almost in concert. that said, i think it continues to widen. jonathan: looking across the curve, two-year curves. i'll be going to address towards the depot rate at the ecb or start thinking about rate hikes? what will happen to the front end of bunds? greg: you slowly moved towards the depot rate. at some point you will see a move towards the depot rate, not anytime soon, put you need to see the normalization. that will take time. george: the global rates have

been supporting all fixed income markets. it is critical to see what happens in europe. people complain about bond bubbles, that i was artificially engineered by the ecb in europe's case. jonathan: i feel like are so many year we sat here and said, this does not make sense. yields don't make sense. look at the data, the unemployment, growth. i can't see why you have -70 on a one-year german bund. 40 basis points on a 10-year. could we say that for a few more years? greg: it's important to decompose the front and in the backend. bund market is driven by the ecb. the backend in europe and the u.s. is driven by inflation dynamics and growth dynamics. the truth of the matter is those

are not necessarily overly robust. he lay her on top of it a tremendous need for duration and yield. there is a starting yield market. you really need to see something meaningfully. change jonathan: you had a great year not only saving the short and. you think that will be the story next year? greg: i do. the same story but with more volatility. i think the issuance in the market is going to drive more voll, but it think the general trend is still in place. the demographic trend is really tough to shake. therein lies the fundamental issue that the economy faces. jonathan: matt, inflation risk. there was an option this week. some people referring to that is just a call option on inflation next year. is it a hedge or something a little bit more -- more people

having more conviction about what may happen going into 2018? matt: we think it's a good time to buy a call option. you have countervailing forces. the print has shown 1.5 is still muted. we think there are two dynamics. there is an unwind of a global disinflationary trade that is slowly going to stop the present inflationary levels. they will continue to have that build. it will not skyrocket, but as the global suppression unwinds we think you will see a build in inflationary pressure. not a bad time to look for the call option to the upside. that could bring volatility next year that is not forecasted currently. jonathan: is now the time to buy the call option? see if thell phillips curve is dead or not in 2018. it is not a terrible call option to have, but the inflation pressures are not as pronounced as some people believe.

we think the phillips curve is very flat. the further we get the unemployment rate down, you will see that kick in the wages. the structural forces are going to be there and keep inflation in check. you can spot the cyclical move. at least at some point in 2018 inflation will move higher. having the call option makes a lot of sense. jonathan: good on a flame a test below three's? aorge: we think there will be move towards 3.5%. we will see how all the fiscal stimulus gets through and have it result in more jobs. the scope of the economy continues to grow. jonathan: gents are sticking with me. coming up, the auction block. the u.s. tax bill causes a u-turn in the market. this is "bloomberg real yield." ♪

♪ jonathan: from new york, this is "bloomberg real yield." it is time to head to the auction block. it was a record year for global investment-grade issuance. it talked to $.2 trillion with 8300 debt sales. banks forecasting lower issuance next year. the sector sold a record $55.6 billion in december, breaking a record that stood for 32 years. in 2018, the west is about the cell the most the debt in eight years. to discuss supply and the demand for it, greg peters , george

goncalves. matt toms. greg, let's talk about credit and treasuries. let's have a discussion about credit and the supply we could see. we've had record years after record year. his next year going to be different with the tax plan? greg: each and every year it is forecasted for oversupply and it never happens. we are breaking record after record. many people have the same type of levels, but it will be quite elevated. corporate america is still very much focused on debt and that is not going to change anytime soon. jonathan: matt? george: completely agree -- matt: complete the agreed. there is a trend towards funding and the dollar market in the european market. if there is a vulnerability it is a increasing reliance on dollar funding in euro. we don't see a force that has a unwind in 2018. jonathan: the amount of supply we have seen this year and draw the station between the issuance that is come through for

refinancing and the issuance just a push up the debt? george: if there is any year with your reduction, next year is the year. we have always been hard to call these tops. there is a taxable implications. there has been some pulling for to financing. the fed has been the most televised fed in history. jonathan: they finally did with they told us they would do. george: it was well televised and corporate borrowers took advantage for the last 18 to 24 months. we did see a little bit of a pullback, only thing. investment great issuance will continue jonathan: there was some worrying turn in growth issuance? it is just refinancing? matt: it is 5 it is a little bit of growth. growth is higher but that is also higher as well. they are refinancing, but also adding to this stockpile of debt. jonathan: let's talk about the demand side. will there be the appetite in the same way there was this

year? i looked at high-yield and i can compare high-yield to other risk assets this year. , compare to 500, em the performance of junk debt. debt has donenk nothing all year. why? greg: supply dynamics are different. the buyer base is different as well. what helped the investment-grade corporate bond market has been the foreign participation. foreign investors have been forced out into the u.s. market. they either by duration or credit, but they don't get on a high yield. it is more of a captive audience. as a consequence it has not performed the same way. you had some idiosyncratic issues pop up like toys "r" us and others. i think it is cap the markets. somewhat on edge jonathan: walk me through what we have not had a performance against the backdrop a strong performance in risk assets. why high-yield is completely lagged.

matt: it's important to note it lacked within a very low volatility range. 5.5% to six recent yield range over the year. you have clipped a decent coupon. it is the bubbling up of demand for other asset classes that has propelled them as far or further than they should have gone. it is hard to look at high-yield as a failure. it is more looking at global flows that push other things further, including ig which is near 94 basis points in a low range this year, and equities. it's important to note is not a specific weakness. the internals are quite strong. jonathan: is 2018 the year for coupon clipping or do you get capital returns as well? matt: it is harder for forecast a lot of capital returns and the fixed income market. it is a year for coupon clipping and looking to avoid downside risks. we believe you were meant to sell the rallies, not by the dips and avoid downside risk.

george: totally agree. returns will be about half of this year and fixed income. much wider distribution. what punctuated this year was such a narrow distribution of outcomes that the base case was easy. now you have a base case but you have upside and downside around it. it's a much more treacherous year in 2018 than a has-been this year. jonathan: you agree? george: i think so. differentiation steps and as the fed keeps raising rates. igthink eiji benefited to -- benefited. that will go away. each time funding costs go higher, said raises the race to make ig. less attractive jonathan: why with the flow stories not be beneficial this year -- next year? why is that flow story still not positive in the united states? your costs oflly

getting into the trades are more expensive. bothrates were at zero, japanese and european investors were agnostic. they would stay local oracle global. now that will probably say local. matt: greg: across currency basis is the real equalizer. they can't meet different rates. -- deferral rate. i don't think you'll see the same kind of flow and i don't think you will see the same kind of talent. jonathan: is that why you might see more u.s. money going to europe went on an absolute basis it might outlook attractive, but once you compensate it looks like nothing else? greg: the problem is it's a very volatile estimate. youcross currency basis, don't buy a credit because of cross currency basis. that evaluated think about it. you need to disconnect those two. jonathan: do you agree with that? george:.absolutely jonathan: i want to give you a

market check as we approach the close of the year not too far away. story, of 15 on a 30 year note. this story is curve steepening, not flattening. still ahead, the final spread. the week ahead features a glimpse of potential political trouble in europe. this is "bloomberg real yield." ♪

♪ ferro.n: i am jonathan this is "bloomberg real yield." it is time for final spread. coming up, u.s. and european markets closed for christmas. a light week of events. u.s. economic data, and the italian prime minister is expected to hold a news conference marking the end of his administration and the start of the countdown to spring collections. #and --gregme,@,

peters, and matt toms. it has yielded very little for our efforts. why should be worried about politics now, if at all? matt: ultimately you need to look to the change of the ecb leadership at the end of 2018 and in the 2019. the political framework in europe will guide how much leash the ecb gets. if you infuse volatility ahead of that, that could create turbulence in markets. abouts not being talked but it will come center stage in the second half of 2018. jonathan: if you take the catalonian regional debt and look at the performance of the bond, did he faded the panic, there was a massive opportunity to buy the bottom in september-october. that captures the whole story of the year in europe. don't worry about the politics.

what is a going to change? greg: politics have been basically white noise this year. you have been paid to focus on the fundamentals and was happening on the fiscal side. i still think that's the trend. i think politics, unless you see something fundamentally shift and the rise of populism everyone was worried about this year has subsided, i still think you are better off focusing on fundamentals. george: after the french election it went flat in europe. zero voll and european government bonds. that speaks to it. . all these side jobs and sideways jonathan: i think for many people outside so the europe performance that it difficult after the french election to find a way to capture the positive story in europe. yields just won't go high. he can't get into equities. he can't squeeze much out of that at the back end of the year. one place you have is cocoas, bank debt.

you can see the performance the 2017. we have absolutely ripped. is there anything left to squeeze out of one of the big trades in europe this year? greg: i like european financials, but cocos, there is a misunderstanding of the co-option. they really don't know what they are investing in. jonathan: what you thinking? greg: you're better off more senior in capital structure because these things can get advertised. it is hard to price the option. it's nothing more than a data trade. that works when it works, but then there is an idiosyncratic issue and they get completely wiped out. day.ost basically 90% in a that is a structural issue i think people underestimated. jonathan: matt, do you agree with that? the protective supple little bit? matt: i would agree with greg. this is not to be taking

longtailed risk. the reward is just not there. that is true across the vix and income spectrum. it is time to upgrade a portfolio and not take longtailed risks. jonathan: is that the thing next year? de-risk a little bit? greg: it's about taking chips off the table. you just had massive tax cuts. what are you getting from it? that is not a great risk reward from investor standpoint. i think many investors believe it is ephemeral and a very big cost. i think you're getting paid to thde-risk. risk premium is piked. jonathan: we will wrap things up and look at 2018. one word answers city can. 10-year u.s. treasury's? higher or lower by the end of

2018? greg: lower. george: higher. matt: higher. jonathan: wider or narrower? yes a whole this until the year end of next year. tesla 2025, or the austrian century bond? tesla 2025 when the austrian century? greg: austrian century. george: long-duration, austrian century. matt: i will do the same. austrian century. jonathan: some consensus on an austrian century bond. thank you. that does it for us. i will see you next year. this is "bloomberg real yield." ♪ is this a phone?

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david: from bloomberg world headquarters in new york, i'm david westin. welcome to "bloomberg markets: balance of power." this is where we focus on the intersection of power and business. here are the top stories we're watching at this hour. president has signed the tax overhaul bill. it is now the law of the land. businesses and individuals scurry to find out what it means for them. the government will not shut down. the president signed a stopgap spending bill to keep washington humming along, at least for one more month. catalonia still wants out, or at least it has elected more independence candidates. the prime minister's people's party loses out. before we get to the big