jonathan: from new york city for our viewers worldwide, i am jonathan ferro. yield.""bloomberg real ♪ up, trade warng fares to geopolitical concerns. one thing washington can guarantee is more debt. the u.s. needs a foreign investors to step up. we begin with a big issue. geopolitical risk, the new market concern. >> it is a tough question,

trying to predict unstable politics. >> the middle east. >> at the top of the list is trade and geopolitical. dazed and confused by the trade, policy rhetoric, by geopolitics. has moved wayeast beyond what we think. we will not bring back the old middle east, the old syria, libya. the middle east is broken. away from a too far point where the escalation of tensions between countries can become significant. is a massive short in the 10-year space. catalyst can really set it off. jonathan: joining me now is craig bishop. made it in.r has

matt from illinois is freund. great to have you. this quickk about switch from one narrative to another. why are we doing this? rachel: we entered the last couple of years with a very positive backdrop. the first quarter tends to get quite distracted by disappointments on data. is a lot ofhere uncertainty, but there is uncertainty all the time. you're never going to know what happens next and i don't think we feel that uncertainty right now is more worrisome than recently. aregeopolitical pressures real and there are a couple of spots that are particularly focused. it is not only the middle east, it is china and russia and all of these have the potential to become something bigger. the margaret can frequently get

through geopolitical things like that. narratives, but the volatility around some of is thepolitical tensions fox in the henhouse. of then: the equity side story has been upset over these narratives the last couple of months. credits greaten sufferings of the same way as we have in equities. >> that is absolutely true. is thoset we have seen risk off, risk on environments which tend to be more frequent and they have been in the past. that will continue to be the case as we go forward. with regard to the global risks, there are geopolitical risks, and as they simmer, depending upon whether or not the summer turns to a boil -- simmer turns to a boil, the impact will be

fixed income. potential long-term impacts -- matt, someone said to me fixed income investors have a framework for investment shaped by a few tweets from one individual in the white house, that probably is not the way to go. matt: not at all. the markets have to remember we survived all clinton's scandals scandals, then's bush wars, some of president obama's policies that might not have been as business friendly. the medium has changed with the tweets, and i agree with the other panelists. these sorts of risks change much more than the fundamentals. the storiese of

that has been made is the big story for the havens. you don't see the proportional move from equities into treasuries the same way as we did a year ago. it is a big focus of this program and i am trying to get a better under -- better understanding as to why, why risks don't have the same haven quality they used to. that what has changed is we are seeing the correlation between stocks and higher policy bonds change. one of the reasons is that we are getting more back to normal, more back to an inflation mindset. you are clearly right. feel risk on, risk off anymore. it feels as if things are moving in the same direction. that is causing problems for people. their hedges aren't working and you may have to much leverage, given the volatility. there is no quick answer.

i think it is going to take a couple of quarters at the way thisto see which falls. the inflation answer is the strongest right now. rachel: we think the more bullish case is possibly right around the corner. there is the supply, particularly in the treasury asset class. you are seeing the deficit moving up. the expectation is there will be more issuance. you are seeing less buying, with the balance sheets beginning to shrink. but we think the demand is somewhat limited because people are concerned about u.s. political behavior at the moment. the cause of greater geopolitical uncertainty and stable hold off anymore money back to the u.s. treasury markets. we think the demand will be there. as inflation continues to move up, it will bring people back to

the treasury markets. jonathan: just to pick up on thething rachel said, is cbo is out this week, saying we could have a $1 trillion deficit, in 2020. say people i have spoken to this could be next year. is that weighing on treasuries as well? --ig: treasury yields want 2% last year. the rising debt isn't a new story. the markets are anticipatory. the rising yield was in anticipation of that, as well is what the fed is going to do with sheet.ance our rates have seen likely close to the highs for this year, maybe 2%. 3%.

we don't see rates moving higher next year and we think they will hold for this year. will be dictated by fed policy. you will see short-term rates creep up and watch that flatter yield curve as we continue to move forward. jonathan: matt, is that what you see? do you see the flatter yield curve through the year? to what extent does the reaction change? people are so many expecting a high yield curve despite risk aversion the all square? -- elsewhere? matt: the long end, which is more driven by growth expectations -- rachel's point supply-demand is a very serious long-term concern, whether it is the social security trust fund, the fed balance sheet, whether it is deficits.

run, we think that inflation expectations have actually peaked. i think that inflation going up is baked in the cake. i don't know if it will get dramatically hired then -- hi gher than 2.25%. fed minutes. they talked about things flattening out. to point is starting to the downside and that is all being very supportive of the long end. the front end, the fed chair has to beery clear they want neutral rate to be around 2.5%. we think they will get there by next year. we had this interesting dynamic nothing too, dramatic. by nex summer. the long end is being very

supportive by global growth, stalling out where it is. jonathan: would you be willing to buy the long end? people would be willing to buy the front-end, because why take the risk? matt: there are two questions, how much duration you want to have in your portfolio and how you put that duration in your in. -- duration should be at or slightly below your targets. we would build that with a combination of friend and exposure, with bank loans and credit, and a small slice of long duration. if the a great hedge economy weakens unexpectedly. we like duration.

we have moved to longer duration portfolios.t jonathan: good to have you with me. comingrachel, matt -- up, the auction block. amid tension in the middle east. next. ♪

jonathan: this is "bloomberg real yield." all the tension coming up on the

middle east to did not stop stocks coming through -- bonds coming through the week. than $15eived more billion in bids. and the first dollar bond sale in two years. the biggest dollar bond for an emerging market nation in 2015. the auction bid failed to happen. u.s. sanctions against russia causing borrowing costs to search. this is the first debt option of russia has abandoned since 2015. the investor appetite has not gone anywhere. i talked with goldman sachs and was stillne employee comfortable buying emerging markets. take a listen. >> i want to take that risk. i think you will see

appreciations. interest rate differentials between emerging markets are still very large, despite the fact of this erasing differential, you have to think about flows of capital. higher growth markets versus emerging markets versus developed markets. jonathan: still with me, craig, rachel, matt. matt, there seems to be an immense comfort, with that risk over the last year. it has been a weaker dollar over the last year. taking still comfortable that risk to get that pickup in e.m.? matt: the dollar has been on a weakening trade. we are neutral e.m. from a debt perspective. really the things that hurt the dollar, slower u.s. growth relative to europe.

it feels like we are in transition. it feels like we are in transition. the united states is doing better, relative to europe. the dollar may policy and consolidate. i don't think you will get the easy gains you had over the last six months. craig: we do like e.m. at this point in time. we are positive on the fact there are opportunities there, especially as the dollar continues to be somewhat softer. .ou have to be cautious jonathan: for most investors, the consensus view was have a pro-cyclical by. hearing more and more about de-risking, and the continuing concerns. morgan stanley says rising interest rates may shatter the

jump on window. where are you guys on high-yield credit, now? rachel: there are questions about technicals, fundamentals, and on the fundamental side, defaults are low. we're only seeing one very big default. iheart brought the average default rate up just over 2%, still very low, historically. have seen, generally speaking, leverage moving up. high-yield, one very big signal is the level of issuance and tripe -- in triple cs. 20% amid more than new issuance as high as 12% from 2005-2007. the actual amount of leverage in

the new issuance isn't extreme. there have been outflows from the high-yield asset class, year to date $20 billion has flown out of the mutual funds. that could be an alarming number. there is a lot of cash flow that comes out of the high-yield bond market. billion just$20 this month being freed up. jonathan: the maturity while for high-yield is very backdated. rachel: maturities have been pushed away into the future. one of the things became into 2018 believing was that there was going to be a time of new issuance in the market this year because there would be a lot of mna announced. some were announced, others have unraveled, like the broadcom-qualcomm deal. -time warner deal has

already been funded with $30 million -- $30 billion in debt and is likely to come undone and the money will go back into the market. aboutan: matt, we talked whether the treasury could give you that sort of risk aversion protection. would think that would be whether much -- where much of the resilience would be for much of this year. why? hard to talk about tripolele cs as a group. seen a lot of report in the energy stakes. energy stocks are really on -- unchanged on the year, despite .he increase in oil prices a lot of names were iffy back in 2016 -- they are doing quite

well. the high-yield fundamentals are very strong. the high-yield market today is actually smaller than it was three years ago. are cautious on is the longer, higher-quality high-yield. space can lose twice, if rates go up and the spreads will widen. jonathan: rachel, quickly? rachel: high-yield has done well, your to date, along with equities. the investment rate has done less well. -- investment grade has done less well. jonathan: you are all sticking with me. let's get a market check on where bonds have been this week. 236, you do not get the same move further down the curve and it is flatter int he -- the

treasury market. still ahead, the final spread. this is bloomberg real yield. ♪

jonathan: this is "bloomberg real yield." it is time for the final spread. earnings season and the united states really pick up, with banks reporting. plus, donald trump be meeting with the japanese prime minister. the bank of canada will be making a rate decision, and facebook as well. still with me, greg, rachel, matt.- craig, rachel, rachel, i want to reflect on the quarterly earnings. what has changed in the last few months, the macro-backdrop, the fundamentals? rachel: i don't think a lot has

changed. the market has gotten very flustered by the pickup and equity volatility. do you think it remains higher than it was last year? in the zip code of 15-20, it does not disrupt things. earnings are going to be very solid. have been in awe blackout. it has been calm. and quite smooth sailing on economies. in a: i think we are goldilocks economy right now. we are still waiting for the fiscal stimulus. it hasn't happened yet. it has already been built in.

once trump was elected, rates moved higher, expectations of tax reform started february of 2017. we are not going to get more of a boost. it is already built in. jonathan: you don't think this will be more of a widespread issue? ig: a more normal stories seems to be far off, given everything going on in volatility. questions.uick fire over the next few months, does the rate issue start to pick up or does the equity volatility issue come down? rolls over. matt: right. craig: it continues.

we have already cnet with equity volatility into the credit suisse -- and the credit space. treasury the ten year through to year end for bonds -- or bunds? rachel: treasury. ?onathan: saudi all: yes. jonathan: too easy. that does it for us. same time next week. it this was -- this was "bloomberg real yield." ♪ mark: sally yates, the former

acting u.s. attorney general, said president trump would lose the moral authority to lead the nation if he refuses to be

interviewed i special counsel robert mueller. the president's behavior at a conference in new york. president trump's legal tame -- team has not said whether he will answer direct questions from special counsel robert mueller. russia's ambassador has accused the united states of breaching international law by threatening a military intervention in syria. u.s.'s consumer stick approach to the un security council has inspired reckless conduct in the approach of sovereign states international law and was unworthy of its membership to the united nations. the congressional democrats who served in the u.s. armed forces are calling on the president to stop using twitter to announce international securities decisions, particularly in syria.