jonathan: 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ jonathan: treasuries will help the week after 10 year yields hit for your hides -- highs. the easy money sent to continue in japan as the governor gets another term. we began with a big issue, the return of inflation. jitters. too muchd not read into one print, but there is inflation going on. >> this is stronger than we

expected. we felt for a wild at the part of core inflation will move to a higher trajectory in the next couple of months. is a people think there chance of inflation and the economy, and you see strong numbers, that will bring volatility back to a normal environment. makee 10 year near 3% sense. that price has seen for hikes, which is better than it was six months ago when a price that one hike. forhen we get a settle equities it will be because it is driven by equities and selloff. bonds will lead equities down. we have not yet seen it. the idea that bonds will be a safe haven, i do not really get. the likely selloff in equities will come because bonds have to re-christ -- reprice price because we have inflation. around theoining me table is jeffrey rosenberg, kathleen, director of diversified fixed income, and from london, nick, the

assetational at jpmorgan management. great to have you with me on the program. the idea that bonds have no longer given that risk mitigation quality and term lower. i am just 1 -- wondering why have the allegations of fixed income in that? the last clip, i did not catch his name. it is an interesting perspective, but only one of the perspectives. how does the cycle and? that is the big picture question. either the economy overheats and then the fed reacts to the was theing, that scenario that that earlier clip is talking about. equities follow bonds lower. that is the scenario you get. is another way, a more recent and familiar way as to how it cycles in. if there is a shock and shot

delivers a confident shock that delivers a growth shock, then bonds do not necessary led equities down. bonds can be a very effective hedge. jonathan: what is your base case for why you would have the allocation? dofrey: the base case is you not know. you don't know which it will bp or you have to build a portfolio that is resilient to a lots of different environments. the issue is that if you're building a portfolio that is resilient to a downward shock or recessionary outcome, and what you get is inflationary concerns before you get that there is a price to pay. there will be a cost to that. jonathan: your thought on that subject? kathleen: what we might see is a shot but the inflation issue is a greater problem to reckon with for now. jonathan: a lot of people are talking about climate change. moving away from the climate of

low inflation after her -- after reports of u.s. cpi surprising to the upside, are we witnessing a shift are in inflation pick up? kathleen: we are definitely having a shift. we are having a slack in the economy that is quickly disappearing, if there is any there. thatarket has not priced in. what we are seeing now is an adjustment. if the data keeps coming through, there are going to be more and more adjustments for the markets to reckon with. jonathan: i want to bring you into the conversation. nick: absolutely. when you think of inflation, absolutely biased to the upside. the bit you are missing is the international dimension. it is not just inflation in the u.s. going up, take a look a europe and the most recent wage dale -- deal. it was 3.5% to 4% wage growth.

if that is not inflation, i do not know what is. jonathan: i want to negotiate 28 hour week with the wages they get. it raises the question whether you do get inflation or whether this becomes a global bond market downturn. is it the latter or the former? jonathan: having nick on and his -- jeffrey: having nick on in his inflation is right. none of us look at inflation -- the whole narrative has been around -- about global flows on interest rates. a co-determined relationship or you have all of the factors. we take a lot of folks are syria and the u.s. around the marginal data, what the fed says. certainly the dollar is preeminent in its role in financial markets and the role of the fed. the factors matter. it is a reflationary environment, not just from the u.s. perspective. u.s. is in the league, but it is fueled by global growth. jonathan: let's think our teeth

into that debate. the global flow story from one areas bond market to another. we have been told that if we get up to 290 on the u.s. tenure it attracts a foreign capital. does to 95 do it? it for the do deficit? nick: i think it does. 305 becomes very attractive if you're sitting in europe and japan. they do not just focus on treasuries. when you look at the investment-grade index in the u.s., you have 375 or something like that. both ina big pickup, terms of credit spread if you are coming out from europe or japan. remember, globally, there is still money until the end of the year. kathleen: i think you can watch those near-term movements, you

will get more inflation data coming out of other areas in the world, but the bigger picture, i think, is the story that was drawing money into the dollar was that it was just the u.s. alone. from everywhere, i think caps the potential for money to keep coming in. 295 and cameid it back, so there will be levels of testing. the bigger picture is, rates will rise and the impact of , i think on currency your point about hedging is a good one. jonathan: through the week i have heard a lot of arguments as to why it actually ends up with a weaker currency. one of the arguments is the debate about loose fiscal, strongmonetary policy currency. the channel needs to adjust radically to object -- to check

the foreign capital into the united states. does it lead to a weaker dollar? jeffrey: this is in a note we just put out called recalibration and repatriation. only talk about repatriation, they focus on tax. are in dollars. the repatriation that is happening is, you have to look at the data. what most people, ourselves included, have been talking about is influential differential striving to the u.s. it is the rate differential determining the currency. since the second half of the year, if you look at the data, it has flipped on its head. it is the opposite. what is that telling you? it is telling you hedging costs. the hedging cost argument is over with. if you are taking the hedging costs, and u.s. is no longer attracting the rest of the world's flows. it is the unhedged flows that have currency impact. 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 trades if you're comfortable with the currency. as soon as you learn the -- lose the confidence to carry goes away because the fx returns are a much bigger can tone it -- bigger component or at we see the dollar lose its attractiveness because international returns start to look attractive, home alternatives that that her and the flows can turn. that is what happening and that is the dollar declining and concern is driving up interest rates. hypothetical treasury. anonymous country has a treasury secretary that the link up a big budget deficit. how much mistake is it for them to go around talking down the currency? can be an issue. the problem is, the u.s. has great reservoirs of benefits that short-term discussion may not be able to fully drain. jonathan: you handle that really

well. awant to bring you into conversation. conversation about rebalancing away from dollar denomination assets. take me through the book at jp morning -- jpmorgan asset management. is thehe very clear risk mist price is the easy beat. when you look at the policy section in europe, it is at fairly absurd levels. it is set at emergency levels and europe is not an an emergency. the ecb raise see rates. i will have a dramatic impact on the currency and would lead the dollar. by year and, 135 is not unreasonable for that euro dollar exchange rate. jonathan: your thoughts pivot away from dollar denominated assets? nick: we like the dollar denominated assets in places

, fairlyh-yield significant repricing there. we will not let currency hedge. jonathan: nick of jpmorgan. kathleen and jeff rosenberg sticking with me. coming up on the program right here on bloomberg really yield, cfx holding a debt field to break off the stop sign in the u.s. market. this is "bloomberg real yield." ♪

jonathan: this is "bloomberg real yield." i want to head to the auction block where inflation has been raising rates showing up with high grades u.s. issue interval. on wednesday there was a session with zero issuance.

in theion offering later week held, which featured three 10:30 in 50 years. inflation was a highlight were $7 billion of 30 year tips were sold. they covered 3.21, which is less than a previous sale. fiscal strong.d egypt of all places with $4 billion in international investors and receiving 12 million dollars. still with me, jeff rosenberg, kathleen and nick from jpmorgan. , want to get your thoughts because a lot of people are looking up the flows and money is draining out over the last week. kathleen: we had big headlines. jonathan: have easing cracks in the fundamentals? what is: that is interesting. the fundamentals are solid. it is the technicals we have to be concerned about. the technicals drove us to the yields on the spreads that we are seeing.

we have seen some slows. i think you are seeing a big move and investors taking a duration off the table. not sure that is the best idea. the front end of the curve looks like the more exciting place to keep an eye on. that is not something we have done for 30 years or so. i think that is where all the action is taking place. jeffrey: we had a wake-up call on volatility and illiquidity, you saw a first hit in the market and the liquid parks. i think they are liquid. parts.id i think they are liquid. it spread over to the cash market. it has nothing to do with fundamentals. it is not like anything changed overnight with regard to corporate fundamentals. something that has changed in terms of broader market narratives and the outlooks for interest rates and the curve that changes valuations. this movement of rates and

spreads is really interesting because that is about relative value. can you continue to press down spreads in an environment where very safe alternatives, front ends, 2% two-year is a big deal. you have now restored safe alternative yields. that reach for yield trade has to be reprised. kathleen: so much is said behind the curve. thethan: it raises interesting shift we have seen over the last 12 months. is the cost versus investment-grade versus treasury? that shifted in the last few minds -- last few months. how are you thinking about that? nick: you are right. cash is a real competitive -- israel competitive. the reality -- is real competitive. the reality is, you can look at it in a total yield perspective. investmente u.s.

rate index at 3.75% as a total yield, that is not bad. before we expend to high-yield where we will see six in a corner and 6.5 in a total yield. given the attractive fundamentals. busby frank about the fundamentals. corporate america is probably never ever been in better shape. jonathan: it raises the question ifto why they are -- corporate america is doing well, why do we have a dynamic between u.s. high-yield. it is basically collapsed. jeffrey: gm is doing well. look at the improvement and fundamentals. look at the backdrop. e.m. has a history of risks, but they deal with their risks. argentina is a great example. gdp in argentina is a lot lower than in the u.s. -- overtimead some

persistent problems, it stands in a much better position. that goes for much of emerging markets. a veryn: i think it is important time for investors to pay attention. i do see the spreads on top of each other. go back to the fundamentals. 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. i think that emi would buy the dip. ,onathan: i was in europe talking about credit, looking at italy and spain. we had a vera spin -- send in a question. they want to understand why that spread is not widening? jeffrey: you have a lot of distortion in the european fixed income markets because of the role of the ecb.

quantitative using and persistence of quantitative easing going back to doing whatever it takes, we have not had a real credit market in europe ever sense that time. this is financial repression. financial repression is an explicit policy to hold everything together, to buy time, till at the fiscal and political side work itself out. the bond market signals are not real price signals. in london andare closer to the heart of all of it. the spread between bonds in btp's, 12 months ago today and we talked about whether spread would go. where was so much more comfortable? -- why are we so much more comfortable? high andis reyher increasing. italy itself is now healed very it is high and increasing. italy itself has now healed very much.

when you look at italy political dislocation, it is nothing new. very well-run country with a very modest budget deficit. when you think of that spread -- it goes a lot tighter. our target is 80 basis points from where we are now. -- allt does comment that does is put that spread back to 2015 levels. quickly over at jpmorgan. our you comfortable looking at a situation in more -- in europe, do you prefer the risks with the like of italy? nick: you take the periphery risk and high-yield risks in europe. jonathan: great to have you with us on the program. jeff rosenberg and kathleen. i want to get to a market check on what treasuries have been. twos, tens and 30's, on the front and we restrain some of the move.

relatively unmoved on a 10 year yield, even though we did have a fiscal year highest 294. 3.1 2%.four back to still ahead is the final spread on the program. the week ahead featuring minutes from the fed. the powell era begins. this is "bloomberg real yield." ♪

jonathan: this is "bloomberg real yield." it is time for a final spread. is presidents' day here and the united states. stock and bond markets are close. you also get minutes from the fed, the bank of england. the governor will address the parliament's treasury committee. , kathleen and amount ofjpmorgan, issuance that will come from the treasury into next week.

thehere going to be inflation will demand that the treasury needs as they really ramp up issuance in the coming months? that veryi doubt much. i think that is why looking at the short and it will be important. you have supplies from the treasury. you also have companies that are now in scented to start using their cash. they are already in dollar investments. in short duration investments. when those holding start getting sold, those yields will be a lot higher. i think it means the short end will be worthy attention should be. jonathan: thoughts. jeffrey: i agree with kathleen, the short corporate trade is a big one. that is the impact in repatriation. broader question, we will have this for a wild. there is a lot of issuance a has to come. it is the demand at what price.

where will the price be? will -- where will the issuance and up? everybody is focused on the front end of the curve. jonathan: wrappings up i want to run through the rapidfire round. began with the first question. will treasuries offer the safety and need if you get a down drop again question mark -- again? jeffrey: absolutely. nick: absolutely. jonathan: u.s. high-yield or emerging-market high-yield? jeffrey: e.m.. kathleen: e.m. nick: u.s.. gone.an: yet -- yellen is we have powell in the hot seat. i wonder what happens to the ecb. will we get 2.0 after he goes? jeffrey: no. kathleen: no. nick: jens weidmann. jonathan: we will have a

different bond market, that is sure. kathleen, nick from jpmorgan asset management. great to have you with me. we will be here this in time next friday at 12: 30 p.m. new york time. 5:30 in london. this was "bloomberg real yield." this is bloomberg tv. ♪

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