>> from new york city for our viewers worldwide, i'm jonathan .erro this is "bloomberg real yield." coming up, mnuchin sends a message to the market. don't worry about the debt, don't worry about inflation. with 10-year yield hitting four-year highs in the federal reserve sounded optimistic about growth, we begin with the big issues. a big week for treasury supply. >> the deficit you will see in the u.s. which will go from about 3% to 5% in the next year,

it's completely unprecedented. >> if you correlate deficits, government borrowing to interest rate, there is a zero correlation with it. i think rates are going up because of the fear that inflation is going to return and the central bank largess we have enjoyed or last 10 years is going to have to act faster than people think. >> is time to understand what is driving yields higher. is a sort of janet, drip, drip through the year. we know the treasury has more to issue to find out what we expect to be a wider deficit but also to finance the unwinding. >> international investors stepping up to the market and returning back to where they came from. the yields overseas are starting to grind higher, but the hedging costs is where some of the challenges will be. if you look at differences between hedging as a european investor coming into the u.s. market, it is no longer attractive. you cannot get a real yield .ickup coming into the 10 year

jonathan: full house in new york city today. it went pretty well. billion, and the world is still rotating. matt: fancy that. we knew about the supply from a year ago. here it is, the treasury market did a really nice job handling the supply. as i expected it to. again when you're talking about , supply impacts on the market, in the grand scheme of things, the flow impact is very small. there is a cottage industry of hedge funds that try to monetize these flow impacts, and they are so microscopic that it takes a lot of people to try to pick up just a few ticks in the market. jonathan numbers have been : significant. some of these issues have been unprecedented in size.

we are not talking about the bond-pocalypse. there is a lot of be around the deficit by some fringes of the market, do you think it is overdone? kathy: i think supply will be an issue. it is just not going to and with the fed pulling back and deficits growing. we are going to have to absorb a lot of supply but otherwise we haven't had that challenge over the last couple of years. i think it will continue to push rates up. we will see them to continue to grind higher. jonathan: mike? mike i think when treasuries hit : to 75 they were basically -- hit 2.75% they were basically , fully pricing in the expectation for fed rate hikes and expectations for inflation and growth and this last 20 or 30 basis point has been setting a clear level for this supply and like matt says it feels like it is probably almost done. everybody knows what the supply picture is going to refer for the next couple of years. jonathan i want to talk : tactically just a minute.

the short positions in treasuries -- we're looking at monster shorts. how much of a headwind is positioning the high yield when we are already the short in the market? matt positioning has been short : for some time now. when you look at the euro-dollar future positions, people have been underweight the front end of the curve for the entirety of the fed hiking cycle sometimes with more success than other times by people have maintained those short positions for some time. they've recently been very successful. i think what will be a problem for the shorts is if the data starts to roll over. imagine that growth data doesn't keep beating expectations, it might be difficult for people to imagine, but at some point it is going to happen. jonathan take a listen to what : he had said about treasuries. >> we have been underweight interest rate risk for some time and we are turning more neutral. , we think a lot of this move has occurred.

there is no question that the market has to digest the supply , but you're getting to a point where bonds are starting to get exciting and we have not been able to say that in three years. jonathan: colleague, treasuries looking exciting? matt i am on board with mark on : this one, that is unusual. i'm looking at the yields we have on the market. i'm looking at two and a -- the two-year, and it's almost 2.25%. it is getting more difficult to short that. we still are very short the front and. there are still less than three price hikes priced in for this year in the very front end. but it is getting more priced in. our view is they will hike three or four times. there is a little more value you can squeeze but it is getting more difficult to short. kathy: i think exciting is not really the word i would use. i would agree that the two years

looks pretty attractive. we actually think three to seven years, you still pick up a little bit of yield in there. it is not a bad place to be. jonathan i want to bring up : this, the market and the federal reserve hand in hand for 2018 -- what the market projects the fed projects. we get out to 2019, and a spread starts to open up the twin the market and the fed, and open up a whole lot more through how 2020. will those spreads reconcile? mark the fed is projecting three : hikes and basically you have two in 2019 and another two in 2020 until they get to 3% and we actually think that is the high end of the range. it is like 0-3 is the new range on fed funds and zero is easy and three is tight. i think if they get to you will three, see economic data roll over and you will see the curb flatten and maybe even get

inverted if they go that high. matt if you look at what we : expect the fed to do, hiking times, possibly four times, you be talking about real policy rates that are on the verge of tight territory already and at that stage you would expect the yield curve is deftly completely flat. we are definitely on board with the trade, with that is what we are recommending to investors today. jonathan: so much uncertainty where you went for the fed minutes. kathy tells us we can get wage growth without broad-based inflation concerns. this something we can get? kathy: i would say the only that's the only way we will get that is if we get a big surge in productivity, and we have not seen that productivity since slowing down for years and actually globally. it is not a u.s. phenomenon. it's global. the idea we will get to school stimulus and it will spare inflation -- i means for investment and productivity wishful thinking.

>> i agree with that. if you think about how the fed is characterizing their vision in the economy, they link it to things like productivity and the demand for safe haven assets. we know one thing for sure is the demand for safe haven assets should be higher at these elevated levels of premium than other times. >> i can paint a picture where the tax reform for tax cuts are somewhat disinflationary. companies have this new found a bottom line, these newfound earnings and margin expansion and there is a decent chance , they get some of that back to their customers in the way of lower prices to maintain market share, just tremendous price competition across a wide range of industries where cubbies are -- companies are fighting for market share. jonathan coming up on the program, the auction block.

the appetite for high-yield looks strong as spread makes a call to the bond market for the first time in three years. that conversation, next on bloomberg: real yield. ♪

♪ jonathan this is bloomberg real : yield. another look at treasury auctions through the week. what a week it was, there were $258 billion of debt sales from the treasury, the auction showing this demand for treasuries with requesters requiring higher yields. in some cases, yields reaching levels we have not seen in a decade. sprint jumps on for years. the deal did put pressure on sprint's existing bonds and

investors still craving everything bonds this week. there were $14 billion kenya was offering. they proved african dollar debt still has plenty of buyers. still with me, matt hornbeck from morgan stanley. plus we can look them david riley had of credit strategy at blue they -- bluebay asset management, i want to come to you, that push higher we have seen in treasury yields. at what point does that move start to compete for capital elsewhere in high-yield? >> that is the big question. we do actually think the yields will move higher. we have seen a big move taking out some of our duration but we do think we'll be getting to or above the 10 year.

we do think we'll be getting to -- then the question becomes when you have cash rates of two and 2.5%, it is 5.526% -- is that enough to be invested in high-yield credit? i think there is a danger that we see from the pricing of credit to clear for that. that does make us a little wary of u.s. high-yield and u.s. credit more generally at this juncture. mike everybody talks about the : flattening of the yield curve, there's been a singapore recession but there is actually a behavioral impact and that is what we're talking about, when the fed gets the fund raise up

to that 2.5 or 3%, it starts to become really appealing to move into cash. if you'd buy a money market fund at three or 3.5% today which is a real yield about inflation, i think a lot of people would sell all their stocks and all their bonds and other bonds and go into money markets. that is one of the things that causes recession. the change in behavior. jonathan if we go to money : market funds, i want to wonder if we will. >> if the fed gets the fund rates 3% think everybody is going to. i think that is a high water mark. if they do that, it is probably a policy mistake. you have money market yields in the threes. >> let's say we get there and i don't know does your best case. i say we get there. where is more bond credit question mark is investment-grade and high-yield? what areas are looking vulnerable? >> i think high-yield potentially is more about -- more vulnerable to that. not because of the underlying fundamentals -- those were looking reasonable because of

the strength of corporate earnings and because of the growth outlook but i do think it has been quite a lot of move into -- from investment-grade into the double be space. i think there is a lot of duration an extension risk within some segments of u.s. high-yield particularly within the double be space. it is interesting -- the credit held up pretty well in the face of the equity correction that we had but the pockets where we had weakness was not in the emerging markets but it was actually parts of u.s. high-yield. i think that is where we can see some of that pressure. we see outflows already on a consistent basis coming out of that segment. >> kathy, for you, what is the story? for may, sprint still comes to market. the door still seems to be wide open for issuance. i don't see signs of tension yet. kathy: we have a reach for yields, it is still strong, the fundamentals are good and we think it continues to grind down here until it doesn't do that anymore.

when we look back at the previous cycle of a six everything was great, at some point in the rate hike cycle, the money starts to shift out. we had not hit it that but we do think it is awfully riskier. >> always looked of it on this -- it is very idiosyncratic, nothing to do with shorting data treasuries, it has to do with the tax bill. walk me through. >> it is supply and demand which drives market in the near term. it is a sprint curve flattening. so spreads are actually going out and it is not because people are worried about rates, there is a little bit of that. the short duration because they're feeling the brunt of the fed rate hikes. but a lot of the overseas money that is not being repatriated, all the big tech and biotech had piled injure the short duration corporate bonds as a way to print some yield on that money and now that is being pulled back.

there is selling pressure on the front end and the back end of the corporate curve as yields have gone up you have pension plans and insurance companies looking their chops at the yields they can get on long-term corporate bonds and for a pension plan, that is home to them. 14 duration corporate bond portfolios are natural resting places, they are buying. >> to be clear, the tech companies that have been issuing -- a lot of it has been the long and as well. the demand may not be there. this one might not be there. this is investment-grade on the back of the tax plan. >> we have been looking at a number of trades including those related rounds, the potential tariffs on steel and aluminum and so there is opportunity there where we can get a bit of kicker by getting information from equity as well and the bonds as well.

on the tax specifically, the tax side then, yes, basically where we see less assurance going for because of that repatriation of cash. it tends to be things like tech. >> joining us from london -- alongside matt, kathy and mike. let's get your market check for you, to's, tends and 30's. you have to say that despite all of this market action and all the noise around the issue -- treasuries have been pretty resilient through the week. still ahead, featuring comments from both jay powell and mario draghi. we will have that conversation very shortly, this is bloomberg real yield. ♪

♪ >> i am jonathan, this is bloomberg real yield. it is time for the final spread. coming up, one of the main highlights will be the new federal reserve chairman jay powell, testifying before congress. we will get a fresh round of economic data including numbers on just be plus mario draghi -- u.k. prime minister theresa may will both be speaking. to wrap things up,, matt, kathy and mike. matt, what are we looking for from chairman powell? >> i was reading the transcript. they're interesting speeches from powell. i think he will have his eye on financial stability more so than we have seen for other chair people. with that in mind, even though

we don't see risks to financial stability today, if financial conditions can ease as they are trying to tighten monetary policy, that will change. that will encourage the fed to a salaried the pace of rate hikes. that is something that will continue. jonathan: willie -- willie finished near 2%? >> they will be substantially lower than they are today. as the market is forward-looking and by the time we get to the end of this year, we think investors won't have as bright and outlook as they do today. the bar very bullish on everything today except treasuries. we think that will be different. kathy: we think the 10 year rates could peak of about three and a quarter.

they could interest off and that there. 2% is much lower than anything we would look for at that stage of the game. i keep focusing on this negative term. i think that as the fed withdraws the stainless over the years we will see that term move into positive territory. that will likely keep yields higher. >> to get some final thoughts, what are you looking for four chairman powell next week? >> certainly the catalysts are therefore higher termed premia. i would anticipate that we see 3.5 on the tenure during the course of this year. i think it is actually underpriced. i think the fed is underpriced. i don't really except the notion that that will be an excessive degree of timing. we have discussed in us coming through including the tax cuts but also the public spending will be kicking through 2019 and

the fed will be forced to respond to that. in terms of power, he will try to emphasize concert -- continuity and gradualism. i do get will be hard for him to not to sound a little hawkish given the backdrop of inflation and growth. >> what is your view mike? mike: the fiscal situation is a big negative for the markets in general. all of the supply and the deficit -- these runaway deficits and the spending and borrowing is a learned -- long-term negative. >> what is chairman powell's job? how does he handle that? what does he do? >> he will have the thing that great a negative them in the near term. i think that they have to look through that. he has to be really careful about over hiking late in the cycle with the enthusiasm continuing to go up and not take away the punch bowl. >> i'll have to put you into boxes earlier and wrap up this program with some quick questions.

let's run through this very quickly. on treasury -- by the selloff or keep on running? >> buy. >> buy. >> buy. >> keep on running. jonathan: do credits start competing in capital from here he echo mike i think credit is still a : good place to be, i think what it will hang in for a couple more years. >> david? >> not yet. jonathan: we had a greenspan put, a bernanke put. we had a yellen put, and i am wondering if this time is different. will we had a chairman powell put? matt: no. katy: yes. >> yes. david: it will have a much higher strike price. jonathan: it has been great to

catch up with you all. thank you all for being great sports. that does it for us from new york city. we will see you next friday at 12:30 p.m. new york time. 5:30 p.m. in london. we will bring you those comments and reaction with a full round table we finally hear from chairman powell in his semiannual testimony. this is bloomberg tv. ♪

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