or far covered. leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. jon: from new york city, i'm jonathan ferro. this is 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, congress ends a government shutdown, passing a spending bill worth over $300 billion. a ballooning deficit will force u.s. to borrow more than $1 trillion this year. the equity market finally shows a few signs of catching up with credit. we begin with a big issue, volatility making a comeback. >> the market is finally catching up with fed expectations. i think the labor markets are

going to take hold with wages and employment. i think the market is waking up to the fact that the plan that the fed put in place is actually probably justified. >> we have more policy uncertainty which can naturally lead to more economic uncertainty which will lead to more market uncertainty and that will end up with more volatility. >> i would argue it is not really done. these things take time. it's hard to have such a this locating move without leaving all kinds of wreckage around that you are not expecting. >> if the bond market and stock market are pricing in lower long-term yield, that could lead to higher valuations. i don't see a financial crisis on the horizon. but we are paying close attention to it. >> i think this is much more, but qe unwind getting priced in. it used to be the boj was buying. while that is unwinding, the entire market is realizing that this decline that came from qe that is stepping away. ,we have to ready for more

volatility. jon: get ready for more volatility. around the table, greg peters of pgim fixed income, bonnie wongtrakool from western asset management and rob waldner of invesco fixed income. is the volatility going to spread across assets? for the moment, it is contained. does it get across credit? does it get across the fixed income? greg: i think so. the volatility regime is shifting. it is being led by the equity market, for sure. i do think it's going across different markets. i think you'll see it across these markets. bonnie: i think the bigger question is should there be volatility? you have to look at what are the causes of this. because of market sentiment and positioning or because of fundamentals? clearly, you have to acknowledge that market sentiment positioning can have a big influence on the market. that's what we are seeing. this is a market that wasn't

used anything moving. equities going in a straight line up. now we are seeing fairly big moves. in a historical context, not that big. on the other hand, you have the fundamentals. is there a big change the fundamental picture? we don't think so. we don't think there is anything materially different versus last thursday and today if you look at the economic fundamentals. why should there be a different regime if there's no fundamental shift? inflation was low and the output numbers were stable. can you have a volatility shift if the fundamentals aren't going to change? bonnie: you can have volatility shift because of sentiment positioning. people are trying to figure out their view on inflation. seeing a number like friday's makes people stop and think. but if you look at the fundamentals, like i said, our view is that inflation overall is still going to be limited by structural factors. the friday print is still within the range of what we've seen for the past several years.

the fed wants to see wage inflation between 3% and 4%. we are not there yet. they would like to see consistency in that range and we have not seen that. i don't think there is a clear sign that inflation is going to rise. jonathan: i have to say, it is a big debate in new york and across the planet right now whether we are seeing signs of a , regime shift. do you see signs of that? rob: we would completely agree that the fundamentals deeply happened shifted, particularly around growth. i think the key thing that shifted in the last month is worries about inflation. we recently did a survey of global investors and we found almost none of them were worried about inflationary risks at the end of last year. on the other hand, we've just added fiscal stimulus in terms of tax cuts and spending and investors are waking up to the fact that maybe there is inflation risk. the issue is that they were so

complacent before, now we are seeing breakevens rise and yields rising. we think there's an inflation worry driven market rather than a fed driven or financial conditions driven market. risk for it was a tale a lot of people. i asked people about this they , said it was inflation. are we shifting to a world where it's the base case? greg: i think there's a little too much priced in in terms of inflation. on the inflation side, i think it is somewhat heroic, honestly. you are starting to see a tightness in the labor market, absolutely the case. but you are not seeing meaningful wage gains. the report last week was tainted by some weather issues that showed the wage gains moving higher than it ordinarily should because of lower wage workers not showing up because they couldn't get the work.

you have those kind of things going on. i think where we are getting to from a market standpoint you are , really pricing in inflation coming. i'm not convinced. jonathan: shout out to the whole team at pgim. you were the fixed income manager of the year for 2017. congratulations for that. the framework for the whole of the year, stay short the front end, the rate hike is coming, but stay anchored on the long end. do you apply that framework coming into 2018? if it has developed, how? greg: we are still very much the short end. the back end has been tricky. what has changed this year versus last year is the deficit picture. you are seeing a real big move in the deficit. you have a supply story and you have that coming. there's been a big move. i think we are toward the end of

that move, honestly. we thought it was 275. obviously we are past that. we are getting closer to the top of the range here. jonathan: what are your thoughts on this? i think for a lot of people, they felt the buyers would come in. we had auctions of tens and 30's this year. the yields are materially higher than previous auctions, but the bids did not come through on a 10 year sale and did not come through for the 30 year either. is this a market struggling to price the expirations that will come in a treasury that will spend more? the federal reserve is taking a step back as well. bonnie: it is less about the supply and issuance than it is about inflation. similar to greg, last year, we er on in a flatten the treasury yield curve. after that compression in the yield curve, we thought we needed to buy the curve back

because it is fairly fully priced in. the five-year at 2.50 offers a lot of value. where the front end is pricing for the hike, we think the risk is that there will be fewer hikes. jonathan: robert, i want to get your view on something quite important this week. bonds have offered very little to no risk mitigation. if i told you the equity market would be down as much as it is and then told you bonds would hover around 2.85 on a 10 year, some people may not believe me. we are -- why are we not sing the flight to quality? rob: there's one real good reason. i think it's all inflation expectation driven. when inflation impacts markets, it has different behaviors and -- haters when it is a financial conditions related move. in financial conditions, when equities go down, bonds rally and you get that diversification. if you get the market driven by inflation on its own, it doesn't

have the positive impact for bonds and it is neutral to negative for equities. that is exactly the market you've gotten in the last couple of weeks. we are not surprised by it at all. we think it is about the move from complacency on inflation to awareness on inflation. the near-term inflation numbers will not pick up in our view but the market is suddenly aware. that is a big change. jonathan: i think a lot of people trying to figure out where the central bank put us. federal reserve officials have been very hands-off about this. i sat there wondering why, and then this was tweeted out. take a listen to this. "in previous market corrections, macro shocks triggered the risk off episodes. the central banks came in and saved the markets and economy by delaying hikes and easing. this time, the risk is higher inflation. if you think about it, central banks cannot lift markets."

before, they were responding to inflationary risks. now, the market is reacting to higher inflation, the central bank put is not there, is it? greg: the central banks want higher inflation. i think the war they have been waging globally, the past decade is deflation. that is a much scarier proposition for a central bank then modest inflation. i think the inflation story quite frankly is overblown at this point. we are moving from this regime of deflation to slightly more inflation. i don't see it as a 1970's type of scenario. jonathan: this is the final point, i remember during this time last year that this was the trade this time last year. why is it we get to january and february and the reflationary enthusiasm returns? greg: the difference last year versus this year is last year, there was hope. investors were expecting taxes and other types of things.

now, they are actually seeing it. it's a different point in the cycle this year versus last year. i think that's what the markets are reacting to and that's why vol is higher, because of the uncertainty. last year was easy in retrospect. this year is much more difficult. jonathan: it's always the easy money. it really good robert, really point. appreciate your timing. you are going to stick with this. bonnie wongtrakool of western asset management, rob waldner of invesco and greg peters of pgim. coming up, we take it to the auction block. greece taking a step towards normalcy as its bailout nears an end. that conversation is next. this is "bloomberg real yield." ♪

♪ i'm jonathan ferro.

this is "bloomberg real yield." i want to head to the auction block. greece takes another step towards exiting a bailout program in august, selling 3 billion euros of seven-year bonds with the yield of 3.5% inside their initial target of 3.75%. investor orders doubled the sale. topping 6 billion euros. meanwhile, emerging markets issuance is booming. in january, bonds were sold by states and companies, the most in 11 years. a series of treasury auctions in u.s., the 30 years the lowest since november. the 10 had a yield that was the highest in your years. -- and four years. still with me, greg peters of pgim fixed income and bonnie wongtrakool of western asset management and rob waldner of invesco. robert, if i showed you the bond market this week, and greece got away as easily as it did you

, would have never known what was happening in the equity market in the united states and europe. why is the rest of the world, why is the bond market holding up this well in europe? rob: it's all about the drivers of this correction. as i said before, we think it is inflation that is the driver. when inflation is the driver, inflation is good for spain and italy and greece. it is good across most emerging markets. many people would think it is surprising the mexican peso is up 4% year-to-date. there's been virtually no volatility. spain has rallied year-to-date. it's the assets that have the most overpriced valuation having kicked into a correction by this inflation scare. that would be bunds and treasuries, and that has kicked over into the u.s. equity markets. those assets will benefit. greek bonds have done quite well.

bonnie: the eu has to inflate its way out of the debt. in a way it is good for them. i would also point out the ecb has been buying a lot of credit. even though the program is a lot smaller, only 30 billion, they are buying the same amount of credit as they were when they were 80 billion. and mixed between sovereigns and credit. the peripherals are trading like credit. you are seeing that support the spreads as well. jonathan: it is a double-edged sword. ultimately, you need to inflate away the debt. that makes sense, but you get the inflation, the ecb that removes its presence a little bit. what's more important? the you get that balance between one stepping back and one stepping in? bonnie: we would say the spreads here on the periphery are not compensating for the risk. we don't think it is a good buy. we still have to get through the italian elections. the valuations are not where you would want to belong. long. he long -- to be

greg: if you look at the short-term, growth is popping. that would be the term we would use. 2.5% potentially left in one. growth is really booming. in the short-term that is good for these countries. there's long-term sustainability issues. jonathan: if growth is popping, you expect a serious reevaluation in terms of the pricing for bunds. it makes a lot of sense to a lot of people, but what are we going to do? have bunds start eating into that spread even more? that spread will get even tighter? robert: could do. eventually, there may be some pressure on these peripheral eventuallyg appeared there will be feedthrough. the bunds or where it will first show itself. greg: the front end of the -nd market -- the bond market - bund market is clearly

mispriced. that is tied to the negative depot rate. i think that is the most sensitive point. the growth story is an important story for the periphery. it makes sense to me that they can continue to do well as a consequence. in europe, the big surprise has been the strong growth the past 18 months. up thesegrowth props countries and the spreads should reflect that. jonathan: two surprises in the market, the equity market draw down quite aggressively. in europe, the periphery has stayed anchored. in the u.s., credit has remained resilient until quite recently when we have started to see some cracks. triple c has been the most resilient part of high yield, which makes no sense of you think about it. greg: it is a price discovery issue. you look at the derivative market, the pricing is much more volatile because the price discovery is instantaneous. in triple c's, the trade is much more by appointment. you don't know the full value. what i thought was really interesting were the fund flows.

useful outflow out of high-yield bank loans and inflows into investment grade credit. i think that tells you there is still a demand for spread and credit and investment grade in particular. jonathan: do you get the sense -- from the conversations i can tell from the last year is so the big bulk of investment , managers in the u.s. are the risks -- are de-risked in high-yield. they haven't participated in the massive run-up we've seen elsewhere, more specifically in equities. i know spreads are still really tight. but they have been through most of the last year anyway. is this a market -- for a lot of people, they had de-risked. greg: i think investors talked about it more than they actually derisked. but it makes sense to take the risk down given where spreads are. the risk return is not in your favor. you have to pick and choose your spots. is high-yield and aggregate? absolutely not. are there pockets of value?

absolutely. the one area that has value, in our view, are the triple c's. jonathan: the opportunity cost of being in cash, for a credit investor, is a different scenario. most people saying they will be coupon clipping anyway. if they have the drive out of that now, is now the time to work? bonnie: we were at the camp of derisking. at western, we did de-risk in high-yield. it depends on what's going on in the equity markets because they are correlated. we you look at who holds high-yield, 30% is retail. that has doubled since 2005. you can't just say they will operate independently. for us, we would like to see more stability in the equity market and rate market. spreads are wider, but still closer to 300 than not. that is not necessarily an area where you can get a lot of total return. jon: bonnie wongtrakool from western asset management and greg peters of pgim in new york

, and in atlanta, rob waldner of invesco. i want to do a market check of where bonds up in this week. yields at the front end, aggressively lower by 11 basis points. we start to maybe think about a potential rate hike in the near future and what it means for the front end of the yield curve good further down, 30 year yields grinding up by two basis points. still ahead, the final spread. the week ahead, featuring around of economic data including a read on retail and inflation. that is next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. over the next week, president donald trump expected to release his budget and infrastructure plan. we have global economic data coming up all week, including u.s. cpi and retail sales and global gdp. plus, there will be chinese new

year celebrations later in the week that will affect the asian market schedule as well. still with me bonnie wongtrakool , of western asset management, greg peters of pgim and rob waldner of invesco. robert, big data points on reflation but i'm thinking of the asymmetric risk. friday was in a market primed for an inflation surprised. is this a market that is better primed for inflation surprise? robert: i think it has started. this has been a multiyear process of getting used to the fact that there was little inflation risk. now, we are going through a period of getting that back on the radar screen. think it is too early to say we are priced for an inflation surprise. we think the risk of a near-term cpi bump up is fairly low. if you look at the details of cpi. it's hard to see where that will come from. it's less about the cpi print itself. probably more about general inflation expectations. it's a little too early but we think we have started pricing

this in. jonathan: greg? greg: i think the data is ultimately going to calm down the market. have -- if the data comes out in line still at or below that 2% level, that will settle down the market and the fears will be alleviated somewhat. jonathan: i am going to settle down this program and get you guys into boxes and wrap up the final part of this program with a quick fire question. can the pain remain contained to equity as volatility picks up? greg: no. bonnie: no. rob: yes. jonathan: can treasuries act as a hedge against stocks? greg: yes. bonnie: yes. rob: only if we get a financial conditions event. which is not happening now. jonathan: ok. we've had the greenspan put and bernanke put put -- i'm trying o figure out whether a chairman powell put exists. does it? greg: yes. bonnie: yes. rob: no.

it would be a big mistake to ease rates into an inflation scare. jonathan: great to have you on the program as we wrap up a volatile week. but a very resilient week for global credit. greg peters of pgim, bonnie wongtrakool of western asset management, and rob waldner of invesco. that does it from new york. we will see you next friday at 12:30 p.m. new york time, 5:30 in london. this was "bloomberg real yield." this is bloomberg tv. ♪

? yousef: welcome to the best of "bloomberg markets: middle east", i am yousef gamal el-din. markets went haywire and volatility came roaring back as investors braced for rising interest rates. the worst slump in two months, where does it lead. still number one, claiming its crown as the world's busiest airport. we speak to the ceo. it was an