♪ nejra: two months on we look at how they are living with the landmark legislation and what's next. howard davies makes his first testimony to both houses of congress, will it be a focus. brexit in the city. how leaving the eu could impact the london's growing tech sector. welcome to "bloomberg markets: rules and returns." we dive into the regulatory challenges of financial markets around the globe. let's get a round-up.

ed: the securities and exchange commission in the u.s. is expanding a broad crackdown on coin offerings. this according to a person with direct knowledge of the matter. they have confirmed that some are raising money for businesses that don't even exist. the agency has issued subpoenas to individuals behind specific offerings. japan's financial supervisors is laying down the overhaul and shaking up the nation's $10 trillion banking industry. the agency is examining how to change the legal framework so that all providers of financial services are subject to the same rules. it would allow emerging companies, like technology startups, to compete directly with traditional institutions. they could in the monopoly on deposit taking and lending. u.k. consumers will save as much as 1.3 billion pounds a year on low interest on credit card debt under the new rules.

the fca said the rules will help customers in consistent debt or at the risk of financial difficulties. nejra: thank you, so much. now traders across europe are bracing for the big bang, the limits on dark trading. after two months of delays, the european securities and markets authority will publish crucial data about equities traded in private venues. what does it mean for investors? regulators will have the power to suspended trading on stocks that reached the cap in dark halls. multilateral trading, richard said this is one of the biggest changes under mifid ii. he also expects stock suspensions to start for march 12. they have yet to assign a date. how exactly will all of this affect firms? how will it affect them in general right now? joining me is philip chapelle and dan marcus.

welcome to you both. it's great to have you on the program. dan, let me start with you. you provide brokerage services in derivative markets. once the impact of mifid ii on your business so far? dan: we have to look at regulation and a variety of regulatory environments. mifid ii has come in place for or five years after dodd-frank, which in itself was four or five years after the g20 pittsburgh, which was reactive to the crisis. from our perspective as a platinum-plated venue, we tried to deliver better execution. what you now see from regulation is there is more transparency, surveillance, controls to make sure that we can deliver that execution and the regulators on the clients can see what the market is doing so they can size and control it.

nejra: does this make it more costly for you? what is going on under the hood? dan: it has made it significantly more costly to put this new layer of compliance surveillance in place. in some sense that's good it. it attaches a certain level of quality that the venues attracted to them. in other ways, it does limit competition by putting barriers in place for entry and continuation. it's that balance that they have to get right, particularly if they are regulating national or regional basis rather than global, which is how markets operate. nejra: let me bring you in here.

you work in a very different business. i want to ask about the research aspect, which got a lot of attention in the run-up to mifid ii. there been reports that there have been increases and demands for certain types of expert networks. explain what these are. >> there is a fundamental change in our research is consumed and paid for. because of this, people need to pay for research, it can't be bundled up. what we see is if people are paying for research, they will look at different methods. we have seen expert networks fill some of the space that the banks have been leaving. some of the questions of whether the banks -- nejra: they connect funds with research in specific areas, that is what they do? philip: we see a variety of areas. sometimes it will be a case of arranging a seminar with someone from a company or someone related to a company. it does raise challenges compared to more traditional research. there are compliance concerns. you definitely have heightened awareness and some investors aren't keen on it.

nejra: are they concerned about insider trading? is that the ultimate concern? philip: potentially. i think most of the networks to have compliance in place. for example, we historically haven't used the network because we get investor feedback. we are hearing that some people are more now because it's a more phallic way of getting detailed perspectives of research. also, sometimes, there is fear the banks won't have the same coverage of they are charging for research. will they provide research for hot companies? i think people are taking a wider view of where the research comes from. nejra: have issues around research had any kind of feed into your business with clients and the way they might want to trade or what they might trade? dan: we have not provided research to our clients. what it does is potentially add more clarity to this point of execution. what the client is looking at is the cost of execution of what particular financial instrument they are looking to trade without utility cost. from our perspective, there is a level of clarity.

that is a matter for them. in many instances, that might not be as efficient as it was before. when they went to a bank, they went to a wholesale service. if provided a range of services rather than pure execution. nejra: are you concerned that european fund managers might be at a disadvantage to u.s. peers? philip: definitely. it is something we see in european regulation that caused this before. some of the feedback we had from the u.s. investment community was around if i have a european-based manager, they are handcuffed. they have to have insurance. then need to have regulatory capital.

we do find when they are looking at a fund managed european manager compared to the u.s. manager, there's a difference in cost. with mifid ii there is not the same level of unbundling in europe as in the united states. is there going to be more cost? will it hit the investor? for us, most of our research is primary in nature. we don't pass the cost on to investors. most people are not in that position because of the research they consume. when you compare london with connecticut-based managers, there could be a cost difference. nejra: not so much with managers that operate globally? philip: if you have a global manager who is u.s. entities in europe, they have to have mechanisms and how they consume data in europe. they can't use it as a pass-through for research. they can't consume the research in the u.s. and pass into europe

without unbundling. nejra: the sec has tried to make it easier for u.s. firms to comply? phillip: they have made it easier, but there were conflicts in terms of what you could pay for research. a u.s. manager wasn't allowed to pay for the research. it was an issue. the manager was becoming a broker. we've seen them provide clarification around that. it does not allow them to funnel the research into europe and not unbundle it. nejra: any final thoughts? dan: one of the matters you were discussing is different under mifid ii and the u.s. rules. how they go together and attempted equivalents. again, this goes back to the essence of what have been reactive regulatory reforms as a result of the crisis. naturally, different countries have different views as to how

to reform the financial markets to make them operate effectively. you don't have natural equivalents. equivalents have to be created. from a venue perspective, dodd-frank created blue chipping venues for execution. they attach an execution mandate to them, which is not the same as the requirements for mifid ii, which is four or five years later. there have been attempts at equivalents, and in some cases they work, but there are issues around transaction reporting and transparency that need to be addressed. nejra: does mifid ii just need to go global to make it easier for everyone? dan: it can't go global. people try to create global codes of conduct.

they have market standards boards. they are industry initiatives to have global consistency, because whether we like it or not markets are global. nejra: thank you so much to dan marcus and philip chapel. coming up, bitcoin, brexit, and the future of finance. we will look at how to regulate cryptocurrencies and once next after britain leads the european union. this is bloomberg. ♪

♪ nejra: this is "bloomberg markets: rules and returns." i am at the bloomberg headquarters in the city of london. u.k. lawmakers are launching an inquiry into cryptocurrencies to investigate how they should be regulated. they will look at the impact of bitcoin and its peers on banks

and consider if they could replace traditional money. britain is checking the industry, where it's estimated to be worth $28 billion each year. brexit threatens to change the face in europe. let's bring in sarah jane and ed robinson from bloomberg news. let me come to you first. what exactly are our lawmakers looking into with bitcoin and cryptocurrency? ed: it's a comprehensive review. they will be looking at all aspects of cryptocurrencies, that includes bitcoin, all of the dozens of other tokens that have come out in the last few months. they will look at the impact of the underlying technology, distributing ledger technology, they will be covering what consumers see and how institutions are affected by

this technology, from commercial banks and touching on the bank of england. nejra: we've got a quote from nicky morgan. people are becoming aware of cryptocurrencies, such as bitcoin, but they may be unaware they are unregulated in the u.k. striking the right balance to provide quick protection for consumers and businesses while not stifling innovation is crucial. she summed it up nicely. is the u.k. behind at looking into this compared to other countries? ed: other countries took decisive steps to rein in cryptocurrency or to say they will. you see china crackdown on initial coin offerings last year. south korea has been going back-and-forth on banning all trading across the board. the sec in the u.s. is issuing dozens of subpoenas to initial coin offerings which signals

crackdown. in the u.k., it's been a watchful approach. they say they are aware of this and i see the potential, but we are not going to run in with any decisive measures until we understand the ramifications of the technology. that is clearly what nicky morgan is doing now. saying we are going to bring everything together. nejra: have we seen that kind of watchful approach that we were just referring to? does it have anything to do with the u.k. wanting to not be too tight on the regulatory side since brexit? sarah jane: they are pressing ahead with trying to nurture fintech industry. because of brexit, i believe they will issue an option. they will be excluded from that. the u.k. is taking steps as well to nurture its own fintech industry. we have seen even after the referendum in 2016, investment in the u.k. has been exploding.

last year it was $1.8 billion in investment into the industry, which was a 153% rise. investment is not lacking at the moment. nejra: how much is a risk there that fintech companies access a single market? sarah jane: the risk isn't as big as you might think. it is not as they as the banking sector, for example. payment services rely to a lesser extent on the passporting regime. in the event of a hard brexit, they would not struggle so much to access the eu single market. this would facilitate access to clients in the rest of the eu. nejra: what about attracting talent? sarah jane: i don't think will be much of a problem in the u.k. because the industry is highly digitalized and remote working is feasible.

european nationals already resident in the u.k. will probably be allowed to stay. the government has found it will be increasing in special tech visas from 1000 to 2000 in order to lure tech talent into the u.k. it's taking a big step. nejra: when might we hear back on this inquiry? is there a date yet? ed: they did not announce timings on that. we don't know when the hearings will commence. nejra: you cover this sector for bloomberg news. from your sources, do you hear any concerns about brexit or are people quite buoyant because of the approach they've taken? ed: what i've been hearing is consistent with the research, i think at first online peer-to-peer lenders were

concerned. they were worried about credit erosion among borrowers, they were worried that growth would be stifled, that investors would not bring money. those concerns went away two to three quarters in. now you see peer-to-peer lenders like funding circle, which is growing quarter over quarter. they are planning for an ipo this year. they don't see any kind of blowback from brexit. nejra: thank you so much. next, the new fed chief makes his first appearance in congress. what impact will he have on financial regulation? we will discuss. this is bloomberg. ♪

♪ nejra: this is "bloomberg markets: rules and returns." i am nejra cehic. jerome powell was positioned as a continuity candidate in the run-up to the selection as fed chair. investors are starting to mull the possibility that he might take a more hawkish approach then janet yellen as u.s. gdp grows at 2.5%. moving away from monetary policy, what clues have we had about how he will approach financial regulation. joining us is ben elliott, a government analyst from bloomberg intelligence. thanks for being with us. it was noted that jerome powell did not shy away from giving a personal touch in his testimony. does that have any read across to how he might tweak his view on financial regulation? ben: the personal touch question is more important in the monetary policy world with a fed chair has been a dodd amongst many and has tried to disguise from the markets which he represents.

we have better guidelines. we have statutes which the fed chair has to follow, that's the dodd frank act. we have public comments from the chair, which delineate his priorities. we have a pretty good idea of where the fed is heading, in that direction. nejra: what are some of his priorities? ben: he has laid out four top priorities as far as rolling back dodd frank regulations. among those are changing the way the leverage ratio is calculated by exempting some categories of assets from the denominator, which would allow some companies to engage in less risky wholesale activity like custody activities or clearing. the fed wants to bring greater

transparency to its stress testing process. there is a rule in progress to give them more information about the models they use to test banks every year. those models decide how much capital banks can return to their shareholders in the forms of buybacks and dividends. another priority is to reduce the burden around resolution planning. they want to change the volcker rule to allow banks to more effectively use securities. nejra: do the policies actually reflect what jerome powell, what we know of his concerns in regulation? ben: i think they do. he is a known quantity for us. for the past five years, he has been working side-by-side with former chair yellen, signing off on her rulemaking initiatives. he was a voice of restraint in the background at the fed, but

not a voice of dissent. he voted for most of the dodd-frank regulatory infrastructure that is in place today. nejra: we talked a little bit about how the dynamic might work between jerome powell and randal quarles. once your view? ben: my view is the view the chair is most important. i think given the place that the economy is in today, chair powell will focus on monetary policy and look to raise rates three or four times. he will allow quarles to take the lead going after the industry, seeing what banks they supervise and feel the most important recalibrations to the dodd-frank act. i think they will move forward with whatever chair powell is comfortable with.

nejra: what about them? what impact might they have? ben: he was appointed by obama. she will probably be a voice of restraint again. she will ensure that the fed doesn't pull back too much from the dodd-frank infrastructure that is in place now. she will be concerned about financial stability. she will be concerned about loosening the leverage ratio too much in building up risk. more interesting is mark, he was a top lieutenant of the former fed governor, who chair yellen allowed to take point on implamenting the dodd-frank act. there is a regulatory talk out there, it is him. he came on as the new general

counsel. chair powell brought him and had him sitting right behind him at his first public hearing. we can expect that he will be a strong influence there. he will ensure that nothing too drastic takes place in terms of rolling back or recalibrating dodd-frank rules. nejra: interesting dynamics to keep an eye on. thank you so much to ben elliottt from our bloomberg intelligence team. that is it for this edition of "bloomberg markets: rules and returns." if you have any feedback, you can email us. this is bloomberg. ♪

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." ♪ jonathan: coming up, it is a goldilocks jobs report. monster payrolls growth without the inflation shock. positive news for em as the trade war rhetoric fades, mexico and canada escaping tariffs. away from the political drama, capital market still looking solid. debt issue looks fixed up. we begin with the goldilocks jobs report. >> i thought it was a really good report. >> it is impressive. >> it is a great number. >> it is a near-perfect report. >> it is probably the case that you know the headline of

tremendous jobs report is going to be tempered by low wages. >> i would say the overall report, despite the weakness in wages, is probably the best of the expansion because of the combination of the sheer volume of increases we saw in jobs coupled with an increase in labor force participation. >> it is great for the fundamentals because it seems there is still a very large amount of demand for labor, but it is not causing a gigantic increase in wages. >> the reason why for risk assets is a good number, you are -- it is a good number is you are still not getting the wage acceleration, the fed will not be in any rush around this number. >> i was we could get more productivity, i think we will with capex picking up. then allow the cycle to keep going. >> you have a long way to run. the fed can be slow-moving on this, and -- so it should be good for rates. rates are not low at this point. rates are probably at the top end of the range, so a good number at a good time. >> even though the job market is

very strong, we have not seen really strong wage growth. i looking forward to stronger am wage growth in the future. i'm looking forward to all of these things leading to a stronger economy and stronger inflation more in line with our 2% inflation objective. i think we are on a pretty good path. jonathan: on a pretty good path here in new york city as well. joining me in new york is the chief of fixed income strategies at janet montgomery scott, and portfolio manager at federated investors. and joining me from london, i am pleased to say is back with us diana more fixed income , portfolio manager at jpmorgan asset management. i want to begin with you. in the immediate aftermath of the payrolls report, treasuries on offer, yields up. not what i would expect with such a disappointing wage growth figure. why? >> it was not just the long end of the yield curve that was the area that is more sensitive to inflation. it was the middle and the money markets as well. so part of that reaction we have had over the last 30 years is strong payroll numbers, a sell-off in the markets. i think that sort of reflex

reaction is still in force. a little bit longer term, anything that causes the federal reserve to act more aggressively on the front of the curve will ironically compress long rates as inflation expectations come down, as the fed acts concretely to suppress inflation expectations. jonathan: just looking at this payrolls report, is there anything to suggest we get a more aggressive federal reserve? week, we still think we are likely to get four hikes from the fed, and this number doesn't really change that view. we noticed during the week, we had lael brainard, a fed governor's comments coming out and we have a lot of sympathy with a lot of the points she made. keep in mind, this is a fed member who historically tended to be quite dovish, but they are pointing to things we have been flagging. financial conditions remain very easy, at the point where the u.s. cycle is really picking up, and we are seeing growth accelerating. and we have this late cycle fiscal stimulus on top of that.

so while the inflation is not today's story, we do think it will gradually pick up, and this will allow the fed to move four times this year. jonathan: that announcement probably would have topped the bond market news, but it does not because other things are happening. how pivotal is it that the doves are starting to sound more hawkish? r.j.: i think it's consistent with where the fed has been. lael brainard has been actively viewed as a dove, i get that. but i think we have seen former chair janet yellen became less dovish by the end of her term. multiple tightenings by the dovish core of the fomc, setting the tone for the fomc leadership going forward, which will be gradualism. i think this employment report is up their alley. inflation is building, but slowly, average hourly earnings of 2.6%, still ahead of the inflation rate, and gradual monetary policy normalization. they can stick to that script. jonathan: and momentum in the economy is picking up as well. [speaking simultaneously] jonathan: you just want to -- what do you think the fed will deliver versus what is priced in

to the front-end of the moment? >> that is a fascinating question. the euro-dollar markets are basically pricing in two and a half to three rate hikes for the year. i am willing to bet that we move to the markets pricing for rate hikes. i doubt we actually get there. and what it comes down is the random nature of inflation prints in the short-term. we are calling january basically three things caused inflation to exceed our forecast, core inflation. one was a change in methodology in used car pricing. right? so i don't -- it doesn't get much more random than that. i am willing to bet that on the flipside, we get some data over the course of the next six months or so that is randomly lower than expectations for small, basically meaningless reasons, and that forestalls the fourth rate hike even if the markets price it in. jonathan: can we talk about the seasonality of some of the inflation prints as well? if you look at the breakevens, the breakevens curve is inverted. you have front and breakevens front-end breakevens more

than others further along the curve. there is a seasonality to all of this when we start pricing in this near-term inflation pick up, every spring, every year. r.j.: it dates back to the green shoots phenomenon in 2010, 2011. one of the things you have got to consider on the front end of the tips curve is you have built in basically past increases in oil prices that have not quite priced into the index ratio of the tips. i know i am on the technical side. jonathan: you can carry on. guy: but that tends to cause, especially past increases in oil prices that has not been reflected in the short end tip adjustment, that tends to cause the inversion. if you normalize for that, we are not inverted, we are flat on the tips curve. we are not really inverted. jonathan: diana, it raises the point, if we get excited about reflation every spring, does this story just fade as the year progresses? why is this year different than years gone by? why does inflation continue to pick up from here?

diana: well, there are a few things that are fairly different this year from where we have been historically. i think the first 1 -- let's just go back to looking at the labor market. when you look at the reports, you look at the eci, the momentum on eci data is strong. the numbers are strong as they have been for the last few years. when you look at the labor market surveys, you see strong signs that the u.s. labor market is starting to get quite tight. jonathan: yeah. diana: 22% of the participants are saying that labor shortages are saying that biggest constraint to their business -- that labor shortages are the biggest constraint to their business right now. when you look at the jobs data, it also paints a very similar picture. so ultimately, we have not seen this wholesale tightening in the labor market in the u.s. that we're seeing right now. secondly is the fiscal stimulus. you are getting this fiscal stimulus at a point where the u.s. is in the late cycle. so one has to assume that when you combine these things, the risks are actually to the upside when looking at u.s. inflation. jonathan: so what are the risks for treasuries? we caught up with bill gross. take a listen to what he had to

say about when next for the 10 year yield. bill: i think we are going to see fed funds somewhere around 2% or 2.25%, as opposed to 2.5% or 3%, which is what the market expects. and so a 10-year at 2.87% is probably perfectly positioned for 2% to 2.25% on fed funds, not well-positioned for 2.5% to 2.75%. jonathan: does the argument -- resonate with you? r.j.: we are more on the bearish side. the fed is an upward trajectory, the inflation risks are fueled by a weaker dollar and rising commodity prices. i think we are heading higher than what bill gross suggested. would not be shocked at all if we break three on it would be 10. tough to do. we have not gone 2.95%, but we are not more extreme, more bearish than that. jonathan: to get outside of the argument whether we break the magic 3% on the u.s. 10 year, is

it fair to say, is that the consensus to say at the moment is we might be nearly top end of the range on the 2018 10-year yield? guy: absolutely. the short-term trading range we are looking at, most people sort of fall into this camp. drifting on the top end of the range, we have not bounced off of it. i am willing to bet we probably do bounce off of the top end of the range, that three, 3.05 area, right around the time we see a four-dot medium at the fomc meeting and a week and a half or so. jonathan: you are sticking with us, rj and diana. coming up on this program, it is the auction block. cvs completing these -- the third largest corporate bond sale ever on record. that conversation is next. this is "bloomberg real yield." ♪

♪ jonathan: from new york, i am jonathan ferro, and this is "bloomberg real yield." i want to head to the auction block now, where jcpenney has given more time and funds to survive in the ever-changing retail industry. the company sold $400 million of bonds which will allow it to buy back some debt. that matures starting next year. jcpenney has reduced outstanding debt by more than $600 million in the last 12 months. the big headline of the week was cvs as it completes the third largest corporate bond sale on record. it issued $40 billion of an investment-grade debt in a nine part offering. and tether increased the size of its offering to $4.5 billion with dual currency junk bonds behind investor demand. still with me are our guests. rj from federated investors and diana pamela from j.p. morgan asset management.

i want to begin with you and get to the issuance from cvs. the demand of the secondary market was still there, and that issuance rallied when it came to market. is this that phenomenon we have got to talk about, like the more the offering, the bigger demand because it makes up so much of the index? rj: sure, because active management could be overweight or underweight, and cvs has a large composition of the index. so there probably is some of that. but i think really the markets reception, the market is buying in to the fact that cvs is in a transitional phase. they are becoming more of a health care company, less of a retail company. i think that vision is attracting investors. and it was a healthy test for the market. spreads have been volatile of late. it's good to see the deal get done, to be well received, it got bumped versus initial talk, then it traded up in the secondary issuance. jonathan: diana, despite all the drama that a lot of people have been obsessing over over the the last week about who is in the white house and who is out and

what happens with international trade, capital markets have been rock-solid, open for business if you want to bring debt to market, haven't they? diana: yes, they have. i think the cvs deal is a very good example. and for both issuers and investors, it sends the right signal. because actually, in the u.s. ig space, we have noted that issuance is lagging what it was last year. we are still below last year's numbers in the primary issuance space. so it was quite refreshing to see a big new issue come through the market and actually trade well after. but you know, this issuance trend is also apparent in emerging markets. when you look at the em sovereign space, we have a lot of new issues coming in from sub-saharan africa, so in the frontier space. decent sized issuers, which the market was very happy to go into. they had hydrated covers and traded well subsequently. jonathan: do you see the issuance story continue to pick up? because it was a big story last year, particularly in investment

grade. and a lot of people looking at this year wondering after the , tax bill comes through, if it slows down, if debt issuance full stop slows. what is your view as 2018 progresses? guy: there are a handful of names that are going to slow. these are the large tech companies, tens of billions, hundreds of billions stopped over in asset managers in london, ironically already in u.s. bonds for the most part. so they are clearly going to be absent for the next 12, maybe even 24 months for the most part. also, when you see some of the other sectors that are more forward focused on the buyback arena and the debt maturity schedules coming up, i think issuance will be generally speaking a good 5% to 10% lower in 2018 than 2017. that is not a message move. -- a massive move. demand is still there. what will concern me is when we get that maybe $2 billion, not a massive deal. that price is basically on the screws with no concessions versus outstanding debt and then trades wider, weaker in the secondary market. that is going to be the signal that this relatively open capital market situation is closing down.

jonathan: but rj, the moment you don't see much weakness holding credit, despite the fact that we are seeing a pickup in treasury yields, and we are seeing projections from diana about four hikes from the federal reserve the credit is still , pretty decent. people are not pivoting away from high-yielding assets to the safer treasury market with a higher treasury yield. r.j.: we've seen outperformance, for high-yield versus investment corporates.e generally speaking when you look at investment grade securities of any type of fixed income, you have negative returns on the year. jonathan: triple safe and high-yield are the ones that are doing well. r.j.: exactly. if yields are rising and the fed is normalizing because corporate profits are growing, the economy is expanding, it still makes some sense to put some credit risk in your portfolio to get better relative returns. as interest rates rise, the magnitude of absolute returns may be modest, but the relative returns to credit risk still seem attractive. we have peeled back a little bit, but we still like the space. jonathan: when rates were really, really low, the argument

was do you go further along the curve to pick up yield or further down in credit quality? we caught up from rick reider of blackrock earlier about what would happen to credit as the treasury yields and fed fund rate continues to climb. take a listen. rick: i think the front end does take does take capital away from , from other parts of the curve. you can carry extremely well in the front end of the yield curve. you don't have to take five-year credit risks, you can carry, particularly on the front-end, where you can refinance yourself in the repo market at otherwise at negative rates sometimes. jonathan: diana, a big conversation here over the last few weeks as to whether you get that competition for capital elsewhere from high treasury yields from the front end, high rate fed funds in the future as well. whether that starts to compete for capital in credit. further on the curve on sovereigns, but more specifically, that credit risk people have been reaching for to get that yield, whether you have to reverse the thinking as rates creep higher. what is your view? look at it just from a global point of view as

international investors. so you have to take a step back and think at this point in the cycle, who are the marginal buyers? yes, u.s. investors will be very active buying the space, but actually from a global perspective, the marginal buying is coming from the ecb, boj, the rest of the world at this particular point in time. now when you are thinking as an , offshore investor, looking at the u.s. curve and the unclear view on the dollar, does fiscal widening mean you get a weaker dollar, and what does that mean for your currency exposure? actually when you start to look at u.s. rates on a hedge basis for foreign investors, is not that that is probably the way investors need to think about markets here. we do think that yes, the front-end is very appealing now. you get rates of 1.75, in very front end tight money tech products. that will give investors comfort

where theyat a point but i tendy clear, to agree with what has been said already. ultimately, growth is still very attractive, and this should support risk assets and see spread tightening in select spaces. jonathan: she is staying with us from j.p. morgan, and rj from federated investors. in the markets so far this week, what a week, treasuries look like this. yields up two basis points on a 2-year note. we creep higher on a 10-year. getting back to 2.90% and 2.89%, and 3.19%, and inching higher by a basis point. still ahead on the program the , final spread and the week ahead, featuring a fresh reading on u.s. inflation. we will bring you the week ahead in just a moment. you are watching "bloomberg real yield." ♪

♪

jonathan: i'm jonathan ferro, this is "bloomberg real yield," and it is time for the final spread. coming up over the next week, another round of offerings from the u.s. treasury. they will be selling 3's, 10's and 30 year notes, and angela merkel will be inaugurated in her fourth term as chancellor. the european central bank's president mario draghi speaking , and we get the latest read on u.s. inflation. the cpi number -- must watch, apparently. still with me, diana, rj -- diana, in a week where there is obsession over what would and wouldn't happen with international trade, seemingly em is ok. why did emerging markets prove to be so resilient to the rhetoric around a trade war with -- between the united states and everyone else? diana: so i think there are a couple of things at play here. one, the trade that has been announced so far, the impact on

emerging markets is still fairly marginal, so the terrorists that have been -- tariffs have been announced on steel and aluminum are not that large. two, in the commodities space, china is the largest consumer of commodities. so for a lot of emerging markets, what happens to china is a lot more of a bigger driver on the outlook than just the u.s. and i think the last thing is, we don't know what if there is , any retaliation. so we are not yet at the point where it is a war. i would say it is more of the u.s. has made has made an , announcement, and we are waiting to see whether there is any fallout from the rest of the space. but ultimately, historically when the u.s. has increased revenues from trade tariffs, it is standard to coincide with a weaker dollar. so we are seeing some of that dynamic benefiting some of the emerging market currencies as well. jonathan: it is a really interesting point, rj, this relationship between the u.s. dollar and emerging markets. at a time when you think

actually em would get hit, all it has meant is the dollar has gotten weaker and therefore, em will be ok. front and center at the moment, it seems to be dollar and dollar weakness. r.j.: right, right. well the twin deficit story, a , phrase we started using way back in the 1980's, it seems to be back. you are cutting taxes, you are increasing spending. at this point in the economic cycle, that is unfriendly for the dollar. and i think that despite the rate dynamic, that seems to be dominating to some degree. jonathan: guy, is that in the emerging markets, not just the fundamentals, and we can talk about that. the strong composition of the overall index, now weighted towards tech and less towards commodities. the financials are looking better, but it is dollar weakness. dollar weakness seems to be the cushion for em. guy: the dollar is the one factor model in the financial universe right here. dollar weakness means higher ,, rates, dollar weakness means a potential for the fed to act more aggressively. dollar weakness means the potential and the existence of an em outperformance. that is the one model factor of the universe right now.

jonathan: i want to wrap things up with you guys and get your final thoughts in the rapidfire round. we will sum up the program and look ahead to next week and some of this week as well. i will ask a couple of questions, the first one being is reflation euphoria seasonal , or is it different this time? guy: no, it is not, it is a feature of slower population growth. jonathan: rj. r.j.: i disagree, i think reflation is happening, but it will reflate to a lower level than history. we are not taking off and having hyperinflation problems. jonathan: diana. diana: it is here this time. jonathan: are you confident we have seen the low of the 10-year yield in 2018? have we seen the low of the 10-year yield in 2018? yes or no. guy: absolutely not. jonathan: rj. r.j.: i disagree, i think we have probably have seen the low and we are headed higher from here. going to break the 3% level and settle in the low threes over time. jonathan: diana. diana: i agree with the high as well. i think from here we might get a period of consolidation, but the trend is higher rates. jonathan: really quickly here

the trade war talk dominated the , news last week and for markets as well. but if you had to hold one thing going into year end, what it the -- would it be u.s. credit or emerging market credit going into year and? u.s. credit or em credit? guy: u.s. credit. r.j.: i would be on u.s. credit as well. diana: emerging-market credit. jonathan: there we go. to wrap things up, a little bit of disagreement. j.p. morgan, montgomery scott, and federated investors. that does it for us from new york city. we will see you next friday at a special time, 11:30 a.m. in new york, 3:30 in london. this was "real yield," this is bloomberg tv. ♪

♪ >> the one china's nominal roman allowed the president to rule last. no concessions, washington keeps the pressure on north korea ahead of top-level talks. australia wins exemption, the nine security. that deal. betty: mixed messages in the payroll account, rising jobs growth, flatlining wages putting fed policy in the spotlight.