i subscribe to the wisdom of crowds. when everyone got outside on the trade, inflation was coming, 3%

yield on the 10 year. at that point, i like, this could turn. it needs something to help it turn. sentiments usually depend on that. the most recent action in a 10 year treasury is more of a inght to safety, to quality, terms of this most recent move another 2.8 level. >> quite frankly, i think there is a pain trade down to 2.64%, maybe 2.6 in the next few weeks and i think people need to be aware of that. >> risk assets are looking for the two in their valuation, we think bonds look pretty reasonable as well, high-quality bonds. to 5% yield, four and that looks pretty reasonable. me around theing table in new york, greg peters from puget's face income. global cohead of credit at blackrock and from boston, director of diversified fixed income at each invent

management. discuss income i would like to start with you. when we break out of this trading range for treasuries, and where we break out to, most of them i imagine would say to the upside. what are your thoughts? >> i think i might have been one of those that was for the upside. a conundrum here. some of it is a flight to quality, but i also think that we have demands coming in that are caused by the equity volatility. you have folks who are looking risk and reduce their equity exposure, and they are actually coming back into the fixed income markets? >> would you pay trade as a developing, mr. peters? >> i don't know, i think the bonds are doing what they should be doing. at the same time, there is a complete overreaction to the

upside a month and a half ago. a combination of those two fact is with data being more mixed and expectations being more high , i think it was set up for bond yields. >> i think the level of the data matters because you're coming it appeared of time where the commodity downturn in 2016, we had a pretty big global growth and cyclical upside. we are starting to see some of the data starting to weaken up and there is some demand. over the last two years, you have seen a significant amount of clients pile into that equity a void fixedde and income or rates. i think you are seeing that are meant come back and yields the in a much different flavor --

different level right now. >> what has changed in the last week were equities picked up to a certain extent but actually the big came back in the treasury? guest: the bid came back, but when you look at the magnitude of the volatility, i would have expected a bigger rally. i think it speaks to the demand coming in temporarily. we have remain focused on the fundamentals. the data for the underlying economy is still positive. we are expecting a good jobs number. we have not seen which growth, but things are percolating underneath. jonathan: i think that is a good point. i thought the same thing a couple weeks ago when had a down drop in the equity markets. i was surprised that treasuries only dropped lower by about three or four basis points on a 10 year yield. it was not dramatic?

>>. why do you think that is? >> i think positioning was such that everyone believed that rates were going to move higher. i think what has kind of research the levels here is the persistence of equity ball. we have seen this quick spike in l, at a higher level than last year and i think the persistence in higher volatility and equities has had a slow bleed? >> into the rate market? >> so the money is coming to the right market. >> it has not come into a material way in the front and of the two-year space, and i think that is quite interesting. points, a to 50 basis low for this spread come out very flat, not completely flat, but flattening. it is interesting that despite the decline, the rolling over of risk appetite, no one is taking out rate hikes for this year. so the two-year end is anchored. money is going into the 10 year. you end up with 46 basis points. at what point, greg, do we start looking at the front end of the

curve and say, risk appetite has been damaged to such an extent that the fundamentals have rolled over and i want to start taking out rate hikes for this year? greg: yeah, that is where the dots and the rhetoric come into -- the dots come into play. and the rhetoric. the argument a month ago was, how come four is not being priced in? there was a 100% probability of everything going right. i do think if the data continues to come in mixed, you will see the front end get a better bid as well, but the front end at this current point in time is completely and utterly broken. jonathan: kathleen, are you any closer to looking at the front end and saying, that is a buy? i imagine you are not. kathleen: not at all. not by a longshot. i actually think think there is the potential -- it might be a low probability -- but you could see an inverted curve simply because of the technicals.

a lot of what has driven the market to where we are today has been the technicals. that incentive to take risk. and i find it really interesting that at this current point in time, when the fed is starting -- when the banks are starting -- the fed is starting to talk about raising rates and we're not sure if they're going to get behind the curve, all of a sudden you have got the fiscal spending picking up and we have seen this tremendous issuance at the short end. so the treasury bill supply has been overwhelming the market, to some extent. and on top of that, you have got incentives from the tax reform that are encouraging money at the short end to be liquidated. so there is a lot of selling pressure that is going on at the short end that could continue to weigh on the market and push short rates higher. jonathan: greg, is that the reason you think the front end is broken? this dynamic at the front end? greg: that is a big piece of it. you are seeing all sorts of huge issues with libor, bill issuance, other factors around tax policy, and there is really no bid.

jonathan: jim? jim: i think there are opportunities to get high quality carry or get some income on the front end of the curve. we do like the bank loan market. the more floating-rate instruments that you can buy at this time, there are opportunities that you can buy credit instruments globally and hedge back the dollar. you can get a pretty nice carry associated with that. at a period of time when you are seeing a lot of volatility, and certainly are seeing a regime shift in regards where the markets are going and where policy is going. right now, on the front end of the market, with the back-off, you can get a decent income play on the front-end. jonathan: you said the same thing wouldn't you, greg? greg: totally agree. there is an opportunity there. i am not sure you will get a lot of love out of it over the near-term, but there is real opportunity. they do have this pull to maturity. jim: if you look at the rally this year, and certainly in

january, if you look at the aggregate levels of risk, when you think about the return scenarios, they're going to be far more compressed or lower than what we have seen over the last couple of years. so as a way to protect yourself and get some return profile, the front end is a good way to play it. jonathan: greg peters, jim keenan, and kathleen gaffney, thank you very much. coming up on the program, elon musk creditors are having a serious bout of buyer's remorse. that conversation coming up next. ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now where the united states treasury auctions almost $300 billion of debt notes and bill through the week. it is the largest supply ever. the $30 billion 2-year note sale was one of the biggest. since 2014, with a five-year and evan your offerings each matching their largest sales in looking closer at the 2014. two-year option, that sale had a yield of 2.13 percent, the highest since august 2008. over in europe, high-grade corporate cells fell about 30% -- corporate sales fell about 30% compared to a year ago. they were weighed down by a plunge in february issuance. elsewhere, we get to a flashing warning sign from tesla. back in august, investors lined up for a chance to finance the company's ambitious rollout of its model three sedan. but now after a spate of

setbacks, including a credit rating downgrade, tesla's notes have plunged. still with me, greg peters, jim keenan, and kathleen gaffney. jim keenan, in august of last year, for this maturity, for this credit rating, that tesla issue was a record low yield of 5.3%. and it has fallen out of bed. is it a tesla issue specifically, or does this speak to something broader in credit markets? jim: in general, you have seen volatility increased dramatically since you had that issue. it is a combination of aggregate volatility built in the equities, and what that has meant in spread volatility. so the credit markets, and certainly the high yield markets, have been weaker since that issuance. on top of that, you have seen the yield curve move. so there has been a duration component to that aspect. obviously, you have seen some issues with tesla with the unfortunate events of the crash and regulation picking up between that and uber.

there are a combination of events that have weighed on that credit. when you look at the issuing itself, it is obviously a very, very significant, probably market cap company that is growing. so it has to issue a lot of paper or raise a lot of capital. that is certainly going to weigh on sentiment as well because they know they have to come back to the market. jonathan: greg, it has been burning through cash. and for some reason last august, investors were willing to fund the dreamlike returns. except you are a debt holder. you are not going to see the fruits of that dream, are you? so what on earth is going on? greg: that is exactly right. and so this is a free cash flow, negative company that is highly levered. but i think it speaks to the penalty for missteps. so maybe this time last year there was not the same kind of penalty. the benefit of the doubt, maybe, perhaps. jonathan: yeah. greg: so what we're seeing broadly in credit is dispersion. we are seeing a separation of winners and losers.

i actually think that is a good thing. it is not just a single beta trade where you will get rewarded for selecting the right corporates and companies and you'll be punished for making mistakes. that is how it is supposed be done. jonathan: let's be clear, $.87 on the dollar with an implied yield of $7.50. we have come from 5.3% coupon to $7.50. if they have to come back, it is going to be pretty expensive. kathleen, when you compare this to the other triple-c's, this is trading rich to some of their peers in the market. that issue, kathleen, spoke to have tight things got in the credit. do you see the dispersion or the discrimination in this market? kathleen: i don't see that dispersion just yet. we are seeing some cracks in the high-yield market. the new issues that have been coming to market have been struggling if they do not have strong covenants and if the companies are highly leveraged. so there is some discernment coming into the primary market. but high-yield spreads more broadly have not really widened out.

so tesla is very much facing the pressures, as greg and jim have already mentioned, that the company faces, but high-yield still has a way to go. if the short end though keeps going up, it does mean that the corporate costs of borrowing are rising. and what i think is interesting about so many folks who were jumping into the short end to pick up that additional yield, is that with high-yield credits or levered loans, you want a longer runway if they have to grow into their capital structure. and tesla is a good example of not potentially not having enough runway to grow into their capital structure. jonathan: jim, talk to me about that, the opportunities that you might see in high-yield at the moment. because triple c's, that is where the outperformance was. can that continue? jim: it can continue, but i

would not necessarily say it is sustainable. obviously some of that is because of the yield curve move, and the duration component connected to double d's when spreads are supertight. if you just take a step back, growth, there is certainly an uncertainty of volatility on a go-forward basis. but growth is still pretty healthy. corporate earnings are pretty strong. there is a regime shift in regard to the structural volatility. where we are in policy, where we are with regards to the gap in the cycle. that is going to have more volatility. but when you look at the underlying, credit fundamentals are still strong, which is why even though you have seen some backups, spreads are still pretty tight. because the underlying fundamentals of, can you pay back the debt, are still pretty good. we are debating the level of growth but not at recession.

jonathan: we had a conversation with someone from jpmorgan last week on this show. they said this year what you want is the most equity-like products, equity-like securities in fixed income. the performance will come. the capital returns will come. this was a week where the high securities really got smashed around. some people might be screaming at the tv and saying, that is a deutsche bank story. but you did see that start to move the other way this week. so tell me why that is still going to be the story. the most equity-like securities, incomes, convertibles, etc. why? jim: when you are buying, you are buying a solid growth story that is leading to good corporate earnings. there is not going to be volatility. i do think you are going to be at a period of time where you will see more vol and dispersion in assets. the winners and losers will start to play out. so there's going to be vol spikes. i think credit in general does not have the upside. but in this environment, you do have the ability to get some income that is now mid-single

digits and you are protecting against that drawdown risk that you saw in equities in february. jonathan: greg, you're going to have to give us a clue of what you have been doing. what are you looking at? which pieces are you picking up? greg: we too are interested in the short end of the investment market. what is notable is that you are seeing real stress and strain in investment grade corporate's, particularly at the front end, and not in high-yield. it has underperformed its data. on the high-yield side, we actually have been more involved in triple c's than double b's. the part of the market that confuses me the most in high-yield is the short-dated double b paper. i think it is well over owned. no upside it all. nothing but downsides. i think the rotation there is something to look at. jonathan: greg peters, jim keenan, and kathleen gaffney are sticking with me. coming up on the program, we are going to run you through some of the markets.

a big move in the long end of the treasury curve. twos, tens, and 30's. 2.97%, sub-3%. a very small bit of the front end leaves us with a much flatter curve. still ahead, the final spread, the week ahead featuring a new month and a new u.s. jobs report. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up over the next week, it will be a shortened trading week in some areas of the world, mainly due to easter monday. we will look at balanced numbers and the march jobs report in the u.s. plus the debut of the secured overnight financing rate, which is being called america's libor replacement. still with me, greg peters, jim

keenan, and kathleen gaffney. i want to wrap things up with a conversation about what has been happening with libor. kathleen, the conversation continues because the grind high continues for -- i've lost count of how many days. for three months libor. why does that signal a flashing for you? kathleen: i think we want to watch and see how long this is going to persist for. i think there is a market consensus that once we reach april 15 and we start getting revenues in the u.s., you are going to see that come down. i do think we should pay attention to that. because if it continues to persist, we are likely to start to see the market and credit risk react to tighter financial conditions. jonathan: how close are we to that actually happening, greg?

37 days to be precise, the three-month libor has just done this and drifting higher. greg: i agree. i think it is about persistence. the issue with this is that it is not a single factor. it is not just simply t-bill issuance. there are other factors at play. it is hard to disentangle what the true diver is. and there is a big debate around it. but if it continues to widen and it continues to remain at these high levels, it is a de facto tightening. i submit that is already happening. it is causing credit spreads to widen. and if it persists at these levels, i think that is something to really worry about. jonathan: jim, i don't think we should waste too much time talking about if it is a flashing sign regarding credit stresses. when i speak to all of you, you always say no, it is not. but it could have real consequences. are you seeing it start to bite at all? jim: not at all. it is the persistence of it and it is an expense. it is not an expense directly related to the household, but when you think about how many people fund their positions, there is an expense on it. you are seeing people shrink

their books because the cost of leverage and the cost of borrowing is more expensive now. you are seeing some of that play in. i think that is some of the reason you see the front end of the investment-grade market start to weaken out. it has an impact when you think about some of the foreign buyers of u.s. credit or assets on the front end. and so you have seen some selling on that side. so it is definitely having an impact. the longer it stays, the arbitrage of leverage does not work in our favor. jonathan: something we will continue to watch. before i let you go, you know how this works. i put you all in the boxes and we do a quick round of quick questions. i want to begin with the low end of the treasury yield, 2.40% for 2018, have we seen the low for 2018? greg? greg: no. jim: no. kathleen: yes. jonathan: buy the two-year note, the treasury, or get out of the way, the fed is still coming? greg? greg: get out of the way. jim: no. kathleen: get out of the way. jonathan: tesla 2025, or netflix

with a similar maturity through year-end? both companies have burned through cash. both companies have had to raise a lot of capital. to find that growth. would you hold the tesla 2025 or netflix of a similar maturity to year end? greg? greg: netflix. jim: tesla. post selloff. [laughter] kathleen: don't make me choose. netflix! jonathan: go on. you have got to. kathleen: netflix. jonathan: there we go. thank you very much for your time. that does it for us. that does it for "bloomberg real yield." we will see you next friday at 1:00 p.m. new york time. 6:00 p.m. in london. this is bloomberg. ♪ scarlet: i am scarlet fu and

this is this is bloomberg "etf iq". ♪ scarlet: tech cap catch a break and the darlings of 2017 turned into the has-beens of 2018. we discuss with etf manager who is ahead of the curve. we put the question to tim coyne of state street. love i