jonathan: from a for viewers worldwide, i am jonathan ferro with bloomberg "real yield". ♪ jonathan: coming up, treasurers close out the week on a firmer footing, tenure yields hit for your highs. more cracks appear in credits, investors head for the exits in high-yield and investment rate bond funds. but the easy money set to continue in japan as governor kuroda gets another term. we begin with a big issue the , return of inflation. >> i wouldn't read too much into one print but there is clear acceleration in inflation going on. >> stronger than we expected.

we felt for a while that the pot of corinth is going to move to a -- core inflation is going to move to a higher trajectory in the next couple of months. >> if think there is a chance of inflation in the economy any see strong growth numbers coming out, that is going to bring volatility back to a more normal environment. >> the 10 year near 3% makes sense. -, a lotce is in four better than six months ago. >> when we get a big settle -- selloff in equities, it will be because of a selloff in bonds. we have not yet seen it, but the idea that bonds will be a safe haven, i don't really get. the likely selloff in equities will come because bonds have to reprice because we have inflation. jonathan: joining me around the table in new york is jeffrey rosenberg, chief income strategist at blackrock, kathleen is from eden park management, and from london, jpmorgan asset

management. it's great to have you on the program. have no that bonds longer given risk mitigation quality, equities turn a lower, the bond to still turn no one agrees go up. i'm wondering what you want to have the allocation to fixed income in that balanced portfolio. >> in the last clip, it is an interesting perspective. but it is only one perspective but an important perspective. ,how does the cycle and? -- end? there are two ways, a business cycle and the credit cycle and spread the fed reacts to the overheating, and that is the scenario that earlier could is talking about, equities follow bonds lower. that's the scenario you get it inflation is overheating. but there is another way, a more recent and familiar way as to how cycles anend.

it is a shock. bonds don't necessarily lead equities downed, equities and risky assets lead. jonathan: what is your base case for why you would have the allocation? >> the base case is you don't know. you have to build a portfolio that is resilient to lots of different environments. the issue is basically, if you are building a portfolio that is resilient to a downward shock, if recessionary outcome, and what you get first is inflationary concerns will you get that, there is a price to pay, a cost to owning that downside risk protection in bonds. jonathan: kathleen, your thoughts? kathleen: i think what we might see is a shock, but i think the inflation issue is a bigger problem for the fixed income markets right now. jonathan: jonathan: moving away from the climate of low

inflation, after weather reports of wage growth on the upside and cpi on the upside. are we really seeing a shift? kathleen: we are differently seeing a shift here. i would say the slack in the economy is quickly disappearing if there's any there, and the market has not priced that in yet. what we are seeing now is an adjustment, but if the data keeps coming through, there are going to be more and more adjustments for the market to reckon with. jonathan: make, i want to bring you into the conversation. --, i want to bring you into the conversation. nick: when you think of inflation, the bit you are missing is the international dimension. it is not just u.s. inflation going up. take a look at europe. 3.5% to 4% wage growth in german

inflation. if that is not inflation, i don't know what is. jonathan: jeff, it raises the question, whether you get a treasure in a vacuum or this becomes a global bond market downturn. make is absolutely right. none of us look at treasuries in isolation. particularly the last couple of years the narrative has been on and theirlows influence on interest rates. global qe. it is a co-determined relationship where you have all of the factors. we take a lot of focus in the u.s. with the marginal data, what the fed says, and the dollar is preeminent in its role in financial markets and the role of the fed, but global factors absolutely matter. it is an inflationary environment, not just from the u.s. perspective. the u.s. is in the lead, but by global influenced

growth and inflation expectations. jonathan: the global flow story , we have been told again and fxin, when you bake in the hedgecock, the story changes radically. -- 290 do it?it i think it does. but they don't just focus on treasuries. when you look at the investment grade index in the u.s., you are 375 or something like that, so that is a big pickup of in terms of yield and credit spread if you are coming out of europe or japan. remember, globally they are still printing money until the end of the year. jonathan: kathleen, your thoughts? kathleen: i think you watch near-term movements, that you

will get more inflation data coming out of other areas in the world and europe. but the bigger picture i think is a story that was drawing money into the dollar was it was just the u.s. alone. growth everywhere i think caps the potential for money to keep coming in. the 10-year did hit to 95 and come back. -- 295 and come back. i think rates will rise and the influence on currencies, your point about hedging is a good one. jonathan: jeff, you have done a lot of work on this. about how you balance away from dollar-denominated assets. i have heard arguments as to why loose fiscal actually ends up with a weaker currency and one of the arguments is, forget the insurance debate about loose fiscal, strong monetary policy, the argument now is the fx channel needs to adjust radically to attract foreign capital back into the united states.

you put it the other way around, foreign capital fleeing the united states leading to a weaker dollar. this is a notey: we put out about repatriation. the attack still -- the tax deal is a nonissue. you have to look at the data. and what most people, ourselves included, have been talking about for a long time is interest rate differentials drives inflows into the u.s. since the second half of the year, if you look at the data carefully, look at the information, it has flipped on its head and is the opposite. what is that telling you? ,ou talked about hedging costs that argument is over with. if you take hedging costs, the u.s. is no longer attracting the world's flows. the u.s. has been the beneficiary of the carry trade. you are only willing to bear the

risks of an unhedged dollar position in carry trade if you are comfortable with the currency. as soon as you lose the confidence of the currency, the carry goes away dramatically because fx returns are in bigger component of that. if you see the dollar lose the international attractiveness, home alternatives start to look better and the flows can turn. i think that is what is happening and the dollar is declining and concerns driving up interest rate differentials. jonathan: hypothetical treasury, let's pretend, and anonymous country has a treasury secretary building up a budget deficit, how big of a mistake is it to talk down the currency by this treasury secretary? jeffrey: [laughter] it can be an issue, but the problem is the u.s. has great reservoirs of benefits that short-term discussion may not be able to fully drain. how about that?

jonathan: you handled that very well. nick, let's bring it into the conversation. take me into the book a little bit at jpmorgan asset management. how are you guys thinking about it? nick: when you look at the policy in europe, it is at absurd levels. clearly not an emergency and is at emergency levels. so the risk is that we see that ecb raise rates and that will have a dramatic impact on the currency and will lead further to a weakening of the dollar. by year-end, 135 is not unreasonable for the euro-dollar exchange rate. jonathan: are you advising moving away from dollar rated assets?

nick: we like the dollar assets in places like high yields, but critically we want that currency hedged. jonathan: nick, kathleen and jeff, sticking with me. coming up on the program on "real yield," the auction block. that is coming up next. this is "real yield." ♪

♪ i'm a jonathan ferro, this is "real yield." i want to hit the auction block, high-grade u.s. issuers of all places.

wednesday, zero issuance in a session. later in the week, three branches of 10, 30 and 15 years. $7 billion of 30 year temps were sold. it covers 2.31, which is less than a previous sale and a sign that investor appetite for risky sovereign paper. egypt raising from international investors, receiving $12 billion in orders. still with me, jeff, kathleen, and nick. kathleen, i want to get your thoughts on credit. a lot of people looking at the fund flows and money raining out over the last week or so. kathleen: we had some big headlines. jonathan: are you seeing cracks in the fundamentals? kathleen: what is interesting is that the fundamentals are solid , it is the technicals we have to be concerned about. the technicals drove us to the yields and spreads we are seeing. so yes, you are seeing some

flows, i think you are seeing a big move of investors taking some duration off the table. i'm not sure that is the best idea at this moment. looksont end of the curve like a more exciting place to keep an eye on. and that is not something we have done for 30 years or so. i think that is where the action is taking place. jonathan: jeff? jeffrey: we had a wake-up call and illiquidity, you saw it hit the cfx market in the liquid parts, where i think they are liquid, and then it spread over to the cash markets late in the week. spreads -- it has nothing to do with fundamentals. nothing changed overnight with regards to corporate fundamentals. something changed in the broader market narrative and the outlook for interest rates in the short end of the that changes valuations.

this movement of rates and spreads is interesting because that is about relative of value, and can you continue to press down spreads in an environment where there is safe alternatives on the front and -- 2% on the two-year is a big deal and you have now restored safe alternative yields so reach for yield trade has to be reprised. -- repriced. jonathan: that is a good point as well and raises the interesting shift we have seen over the last 12 months. if the opportunity of cash products versus investment-grade and versus treasuries, and that has shifted in the last few months, never mind the last year. but how has that shifted for you, nick? how are you thinking about that? nick: you are right. competitive,y let's be frank about that. but the reality is when you look at the repricing we have seen in credit, you can look at it in

a total your perspective. you have the u.s. investment-grade index as a total yield, it is not bad. but before we get to high-yield when you see 6.5 as a total yield. on a relative basis, that looks attractive, particularly given the fundamentals. that be frank about the fundamentals. corporate america has never been in better shape. it raises -- jonathan: it raises the question if corporate , america is doing so well, it has basically collapsed over the past year. why? jeffrey: e.m. is doing well, too. it has a history of risks, but they deal with their risks and washed out the debt. argentina is a great example. the gdp of argentina is a lot lower than the u.s. so yes, it has had some overtime

over time persistent problems, but where it stands today is a much better position, and that stands for emerging markets. kathleen: i think it is an important time for investors to pay attention because you see the spreads on top of each other, but go back to the fundamentals, because where are there better fundamentals? when i hear fiscal looseness, that is bad for the u.s. if they are on top, i want to go with the asset class where there are better fundamentals. i think that is e.m. jonathan: let's talk about credit over europe, i am talked -- talking about sovereign credit. many people are looking at italy and's being -- and spain as if they are credits. we had a viewer sent a question on the bloomberg terminal, try to understand why the spread is it widening here. why isn't it? jeffrey: you have a lot of distortion in the european fixed markets because of the role of

the ecb, and quantitative easing going back to doing whatever it takes. we haven't had a real credit market in europe ever since that time period. this is financial repression. and that is an explicit policy to hold everything together so you buy time to let the fiscal and political side work itself out. so the bond market signals are not real price signals. nick, you are in london. the spread between bunds and bdp. we talked about where the spread would be after an italian election. why are we so much more comfortable? nick: when you look at levels of support for the euro in a country like italy, it is higher and increasing. one reason is italy itself has healed very much in terms of the economic profile. we all know the result of the italian election. when you look at italy's

political dislocation, frankly it is nothing new. away from that, italy is a very well-run country with a modest budget deficit. so when you look at the spread und, it goes a b lot tighter, and our target for that is 80 basis points. it sounds aggressive, but all that does is put the spread back to 2015 levels. it's better shape. jonathan: are you much more comfortable looking at the situation in europe, instead of corporate credit risks, do you much prefer to take the risk with the periphery with the likes of italy? nick: absolutely, you take the periphery risk and high-yield risk in europe. jonathan: thank you, you are all sticking with us. i want to get you a market check in with treasuries have been this week. twos, tens and 30's. we retrace some of movement of the previous week.

yields are back up 12 basis points, relatively unmoved i -- relatively unmoved. 30 years is down by four to 3.12%. still ahead, it is the final spread on this program and the week ahead. minutes from the fed, the powell era begins in the central bank. this is "real yield". ♪

♪ jonathan: this is bloomberg "real yield." week, monday is president's day in the u.s., stock and bond markets are closed, european prime ministers were fight -- will vote for the ecb's next vice president. we will also get minutes from the fed and bank of england. still with me, jeff, kathleen and nick. thedn't you mail about amount of issuance coming from the treasury, specifically

t-bills into next week. kathleen, will feel be the insatiable demand for treasury needs hey ramp up issuance in the coming months? i doubt that very much. looking at the short end is going to be important. you have supply from the treasury. you also have companies that are now incented to use their cash. they are already in dollar investments, but they are in short duration investments. when holdings start getting sold, those yields will be a lot higher. i think it means the short end is going to be where the attention should be. jonathan: jeff rosenberg, your thoughts? jeffrey: i agree with kathleen, the short corporate trade and theme is a big one, the impact in terms of repatriation. entrance terms of the issuance and your broader question we are , going to have this theme for a while, a lot of issuance to come. it is not so much the demand, but the demand at what price?

where will the price be, where will the issuance end up? everyone is focused on the front end of the curve. jonathan: i want to run through the rapidfire round. will treasuries offer the safety you need if you get a downdraft in equities? jeffrey: absolutely. kathleen: no safe haven in treasuries, look at e.m.. nick: absolutely, safe haven. emerging u.s.-yield or market high-yield? e.m. or u.s.? kathleen: e.m. jeffrey: em. nick: u.s. jonathan: janet yellen is gone, we have powell in the hot seat. kuroda gets another term. i wonder what happens to the ecb. will we get draghi 2.0? kathleen: no. nick: no. jeffrey: yen is vibrant. jonathan: there you go.

jeff, kathleen and nick, great to have you with me. we will be here the same time next week. this is "real yield," bloomberg tv. ♪

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