♪ >> i am jonathan with 30 minutes dedicated to fixed income. this is bloomberg "real yields." ♪ mnuchin sent a message to the market. don't worry about the debt or inflation. the market absorbs a month to a treasury of 10 year yield sticking to four-year highs and the federal reserve standing optimistic about growth, investors wait to hear from chairman powell. we begin with a big issue, a big week for treasury supply. >> this blowout in the deficit

you will see will go from 3% to 5% by the end of this year. it is literally unprecedented. >> if you correlate deficits, government borrowing, interest rates, there is a zero correlation with it. but now i think rates are going up because of the fear that inflation will return and that the central bank will have to exit a lot faster than people think. >> it is a point to understand what is going on, it is not really the deficit, it is growth with inflation and reflation attached. >> we know the treasury had more to issue. also to finance the unwind of the fed's balance sheet.

>> some of this is international investors stepping up from the markets and returning from where they came from. the yields overseas are starting to grind higher. the hedge and causes were some of the challenges will be. if you look at some of the differences such as hedging being and get a european investor, you can't get a real yield pickup getting into the tenure on a relative basis. once you factor those hedging costs in. >> full house in new york city today, joining me is matt hornback, kathy jones and mike. matt, it went well. $258 billion. matt: we knew about the supply from a year ago. here it is, the treasury market did a really nice job handling the supply.

when you're talking about supplying impact 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 will impact and their so microscopic that it takes a lot of people to try to pick up just a few ticks in the market. >> numbers have been

significant. some of these issues have been unprecedented in size. we are not talking about the bond apocalypse. there is a of fear about the deficit by some fringes of the market, do you think it is overdone? kathy: i think supply will be an issue. it is not going to end. 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. >> i think when treasuries hit to 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 will be. >> i want to talk tactically just a minute. the short positions in treasuries -- we're looking at

monster shorts. much of a headwind is positioning the high yield when we are already the short in the market? >> positioning has been short for some time now. people have been underway 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 is that if the data starts to roll over. imagine that growth data doesn't keep meeting expectations, it might be difficult for people to imagine. >> take a listen to what he had said about treasuries.

>> we have been on an interest rate risk for some time. 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. >> looking exciting. >> 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 quarter, it is getting more difficult to short that. >> we're still sure on a very front end. 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. i viewed as they will hike three or four times. more value you can squeeze but it is getting more difficult to short. >> 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 were seven years and still picks up a little bit. that is not a bad place to be.

coming up on the program, the auction block, how you look strong as sprint makes a call to the bond market for the first time in three years. that conversation, next on bloomberg: real yield. ♪

♪ >> this is bloomberg real yield. 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 had not seen in decades. sprint jumps on for years. the deal did put pressure on sprint's existing bonds and investors still craving african bonds this week. there are $14 billion that king was offering. they proved african dollar debt still has plenty of buyers. still with me, met from morgan stanley. plus, we can welcome david riley had of credit strategy at bloomberg 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. 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. >> 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 stocks and other bonds and go into money markets. that is one of the things that causes recession. >> 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 there more bond credit? 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? 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 spread curve flattening. spreads are going up, 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 licking 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. >> 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. we will get a fresh round of economic data including numbers on a u.s. gdp plus mario draghi and 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. there were enough 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. -- to accelerate the pace of rate hikes.

that is something that will continue. jonathan: will we 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. people are 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 in the stimulus 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. certainly, 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 this deal -- fiscal stimulus coming through. 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 think it 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 is a long-term negative. >> what is chairman powell's job? 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. >> 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. >> we had a yellen perp and i am wondering if this time is different. will we have a chairman powell hurt 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. 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 was a bloomberg "real yield." this is bloomberg tv. ♪

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