jonathan: from new york city, for our viewers worldwide, i'm jonathan ferro. with 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ coming up, congress ends a government shutdown, passing an agreement to have a spending bill worth over $300 billion. treasury traders brace for a ballooning deficit will force u.s. to borrow $1 trillion this year. a weaker volatility in 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 market is

starting 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'm going to argue it is not really done. these things take time. it's hard to have such a dislocating move without leaving all kinds of wreckage around that you are not expecting. >> if the stock market is pricing in lower long-term yield, that could lead into higher evaluation. i don't see a financial crisis on the horizon, but we are paying close attention to it. >> i think this is more qe unwind getting priced in. the ecb was buying, and the boj was buying. the fed tapering was not a big deal because of that. while that is unwinding, the entire market is realizing that this vol from cute he is

stepping away and we have to get ready for more vol. jon: get ready for more vol. around the table, greg peters of pgim fixed income, bonnie wongtrakool from western asset management as portfolio manager. coming to us from atlanta or is rob waldner of invesco fixed income. greg, is the volatility going to spread across assets? it is a big conversation. is it going to spread across assets? at the moment, it is contained to equity. does it get across credit? greg: i think so. i think the volatility regime is shifting. it is being led by the equity market, for sure. but i do think it's going across different markets. you will 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? is it 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 and that's what we are seeing. this is a market that wasn't used to anything moving, equities going in a straight line up, and now we are seeing fairly big moves, although 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. jon: what should there be a different regime if the fundamentals aren't going to shift? last year, it was low rates, no vol, but mostly because inflation was low and the output numbers are stable. can you have a volatility shift if the fundamentals aren't going to change? bonnie: you can have volatility shift because of sentiment and positioning. people are trying to figure out their view on inflation. seeing a number like friday makes people stop and think. 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.

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

fact that maybe there is inflation risk. the issue is that they were so complacent before that now we are seeing breakevens rise and yields rising, and we think there's an inflation worry- driven market much like the bond vigilante market earlier in my career, rather than a fed driven or financial conditions driven market. jonathan: it was a tail risk for a lot of people, i think. when we asked them about what they see coming into 2018, they said it was inflation. that is certainly not the best case. are we shifting to a world where it is the best case? greg: i think there's a little too much priced in in terms of inflation. what's being talked about on the inflation side 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 just because lower wage

workers weren't showing up because they couldn't get the work. you have those kind of things going on. i think from a market standpoint, you are really pricing in inflation coming, and i am not convinced. jonathan: shout out to the whole team at pgim. you were the morning star, fixed income manager of the year for 2017, so congratulations on that. the framework of our conversations were stay short the front end, the rate hike is coming, but stay anchored on the long end. you are not going to get that in 10 years, 30 years, etc.. 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 a little more tricky. what has changed this year versus last year is the deficit picture. you are seeing a real big move in the deficit, so you have a supply story and you have that coming. you know, there's been a big move.

i think we are toward the end of that move, honestly. we thought it was 275. obviously, a little past that, but we are getting closer to the top of the range here. jonathan: bonnie, what are your thoughts on this? i think for a lot of people, they thought the buyers would come in. we had auctions of the threes, tens and 30's this year. the yields are materially higher than previous auctions, it didn't come through for the 30 year or the 10 year either. is this a market struggling to price the extra issuance that will come from 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, which we have been talking about, because it determines the yield curves, particularly on the long end. similar to greg, last year, we also had a flattener on in the treasury yield curve.

that served us really well, and then after that compression and the yield curve, we thought ok, we needed to buy the curve back because it is fully priced in. if you look at the five-year at 2.50, that offers a lot of value. the risk is actually that there will be fewer hikes than more hikes. jonathan: robert, i want to get your view on something quite important this week. bonds have offered very little to no risk mitigation at all this week. if i told you the equity market was going to be down as much as it is, then i told you bonds would hover around 2.85 on a 10 -year, some people may not believe me. why are we not seeing a flight to quality as the equity market falls out of bed? rob: there's one real good reason. i think it's all inflation-expectations driven. when inflation impacts markets, it has different behaviors and then when it is a financial conditions related move. typically, in financial conditions, when equities go down, bonds rally and you get that diversification.

if you get a market driven by inflation on its own, it doesn't have the positive impact for bonds, and it is neutral to negative for equities. you get exactly the market you've gotten in the last couple of weeks. we are not surprised by it at all. that is why we think it is about this move from complacency on inflation to awareness on inflation. the near-term inflation numbers are not going to pick up in our view. the market is suddenly aware. that is a big change. jonathan: greg, 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. there is certainly no cause for such uncertainty. i sat there wondering why, and take a listen to this. i think it is really interesting. in previous market corrections, macro shocks triggered the risk off episodes. they were deflationary and stalled growth. so the central banks came in and saved the economy by delaying those hikes and by easing. this time, the risk is higher inflation.

so if you think about it, central banks cannot lift markets. before, they were responding to deflationary risks. now, it doesn't really matter what happens to the market, because the market is reacting to higher inflation -- the central bank put is not there, is it? greg: no, and i think the central banks want higher inflation ultimately. the war they have been waging is deflation. that is a much scarier proposition for a central bank than modestly more inflation, so 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: i do remember doing this 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 fades?

it returns and then fades as the year progresses? greg: the difference last year versus this year is last year, was a hope. investors were expecting taxes and other types of things. now you are actually seeing it. it's a different point in the cycle this year versus last year. i think that's what the market is reacting to, and that's why vol is higher, because of the uncertainty. last year was easy, i would say, in retrospect. this year is much more difficult. jonathan: it seems like easy money. that is a really good point. robert, really appreciate your timing. bonnie wongtrakool of western asset management, rob waldner of invesco and greg peters of pgim. coming up on the program, we take you to the auction block. greece taking a step towards normalcy as it bailout nears an end. that conversation is next. this is "bloomberg real yield." ♪

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jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now where greece took another step towards exiting a bailout program in august, greece 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 market issuance is booming. in january, bonds were sold by states and companies, the most in at least 11 years. here in the united states, a series of treasury auctions, the 30-year was lowest since november. the 10-year sale had a yield of 2.81%, the highest level in four years. still with me, greg peters of pgim fixed income and bonnie wongtrakool of western asset management and rob waldner of invesco fixed income. robert, i want to start with you. if i showed you the bond market, this week, most specifically in europe, the story with greece, you would have never known what

was happening in the equity , inet in the united states europe. why is the rest of the world, why is the bond market specifically holding up this well in europe? >> it is all about what are the drivers of the correction. as i said before, we think inflation is the driver. inflation is actually good for spain and italy and greece. dealing with their issues. it is good across most emerging markets. you know, it is surprising -- many people would think it is surprising, the mexican peso up 4% year to date. there's been virtually no volatility in mexican rates or mexican currency. spain has rallied year-to-date. it is really those assets which had the most overpriced valuation having kicked into a correction by this inflation scare, and that would be bunds and treasuries, and that has kicked over into the u.s. equity markets. so, those assets will benefit like greek government bonds have done quite well.

bonnie: i would agree with robert that the eu has to inflate its way out of the debt. so, in a way, it is good for them. i would also point out that 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. just the mix has changed in the credit. as you were discussing, the peripherals are trading like credit. you are seeing that support the spreads as well. jonathan: isn't this a double-edged sword though? ultimately, you need to inflate away the debt. what's more important? do you really get that balance between one stepping back and one stepping in? bonnie: it is a fine balance, and we would say the spreads here are not compensating for the risk. we don't think it is a good buy. we still have to get through the italian elections, for example. the valuations are not where you would want to be long. greg: if you look at the short term in europe, growth is popping.

that would be the term we would use. 2.5% potential is less than one. growth is really booming. in the short-term term, that is good for these countries. there's long-term sustainability issues. jonathan: this is an important question. if growth is popping, you expect a serious reevaluation in terms of the pricing for bunds. and that is fine. bund yields drift higher. that makes a lot of sense for a lot of people. what are we going to do? have bunds started eating into that spread even more? that spread will get even tighter? robert: it could do. eventually, there may be some pressure on these peripheral bonds from the bunds moving up. like you have seen in the u.s., eventually ig has started to ride it out. but you are right, it is the bunds where this will show itself. greg: i think the front-end of the bund market is clearly mispriced. that is tied to the negative depot rate. trading below the

depot rate. greg: 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. so in europe, the exit rise in the past 18 months has been the strong growth. stronger growth helps out these peripheral countries and their spreads should reflect that. jonathan: there have been two surprises in the market for a lot of people. we have had the equity market draw down quite aggressively. in europe, the periphery stayed well anchored and in the u.s., credit has remained resilient. until quite recently, when we started to see some cracks. i think ccc's has been the most resilient part. that makes no sense when you think about it. greg: it is a price discovery issue. if you look at the delivery of market -- 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 really know the true value.

jonathan: really good point. guest: what was really interesting, i think, were the fund flows. you saw outflow in high-yield bank loans and inflows into investment grade credit. so 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, greg -- from the conversations i can tell from the last year or so, the big bulk of investment managers in the u.s. have de-risked in high-yield. high-yield have not really participated in the massive run-up that we saw in at risk elsewhere, especially in equities. i know the spreads are really tight, is this a market that for a lot of people, they had the -- de-risked? greg: i think the investors had talked about de-risking, then the follow-through, but it makes sense to take the risk down given where the spreads are. the risk return is not in your favor. you have to pick and choose your spots. is high-yield in aggregate a

screaming buy? absolutely not, but is 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, you are missing out of a massive run-up in january. most people sat here and said it will be coupon clipping anyway. does the cash allocation make sense, one. two, if you have the dry powder right now, is it time to put that to work? bonnie: at western, we did de-risk in high-yield. before this event. so i think right now, it depends on what is going on in the equity markets, because they are correlated. if you look at who holds high-yield, 30% of it is in 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 the rate market before we feel like it is a good buy because spreads are wider, but they are still closer to 300 than not. that is not necessarily an area where you think you need a lot

-- can get a lot of return. jonathan: bonnie wongtrakool from western asset management alongside greg peters of pgim in new york and rob waldner of invesco fixed income in atlanta. 2's, 10's and 30's, yields at the front end, aggressively lower by 11 basis points. as we start to maybe think about the potential for rate hikes in the near future and what it means for the front end of the yield curve, further down, 30 year yields grinding up by two basis points. 3.11%. still ahead, the final spread. the week ahead featuring a fresh round of economic data including inflation. that is next. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up over the next week, president donald trump expected to release his version of an infrastructure plan. -- his budget and infrastructure plan. we have global economic data

coming up all week, including u.s. cpi and retail sales and global gdp reports, plus a reminder there will be chinese new year celebrations later in the week that will affect the asian market schedule as well. still with me, greg peters from pgim fixed income, bonnie wongtrakool of western asset management, greg peters of pgim and rob waldner of invesco. robert, some big data points on the reflation front, but i am thinking of the asymmetric risk. friday wasn't primed for an inflation surprise. is this a market that is better primed for inflation surprise? if we do get one next week? 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. i 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. so it is probably less about the cpi print itself. it is probably more about general inflation expectations. it is a little too early, but

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

robert: no. it would be a big mistake at this point to ease rates on inflation scare. jonathan: great to have you on the program as we wrap up a volatile week. a very resilient week for global credit. greg peters of pgim, bonnie wongtrakool of western asset management, and rob waldner of invesco fixed income. that does it from new york. we will see next friday at 4:30 -- 12:30 p.m. new york time, 5:30 in london. this was "bloomberg real yield." this is bloomberg tv. ♪

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