♪ worldwide, i am lisa abramowicz in for jonathan ferro. with 30 minutes dedicated to fixed income. this is "bloomberg real yield." coming up, as the yield curve flattens, it may be time to part -- start worrying about stagnation. plus, can russia win back bond buyer affection. and after a roaring rally, it is now the time to sell junk bonds. we start with a big issue. the treasury yield curve is closer to inverting. >> the flattening of the yield

curve we have seen is, so far, a normal part of the process. moments are run up somewhat, but it is totally normal that yield curves give flatter. >> i am not too worried about the flattening we have seen. it is a normal development. when you see the fed hiking. if it gets inverted, that is a different story. >> we are worried about yield curve flattening, but we don't see that in the near term because we do see the synchronized recovery. >> let's not get carried away. it is not unusual, early in the tightening cycle to see a flattening because the front-end of the curve rises faster than the long and. what i'm looking at is the u.s. 10 year real yields by 30 basis points and they believe growth is going up and that is good news. lisa: the big message, perhaps, stop freaking out? joining me at the table, this is the head of u.s. rate strategy. plus, coming to us from london

ian steeley. morganto us -- from j.p. asset management. ian, when do we start to worry? everybody seems to be so keen on dismissing the flattening yield curve. ian: it is interesting because what you typically see as rates move higher is the yield curve flattens. that is what history tells us. i think what we will see is a few months when we hang around these low levels of yield curves and it moves down toward below -- towards zero, but even when you hit zero, that doesn't mean that they are going straight to recession. it could be a couple of years later we actually go into recession once we hit zero. for here and now, it is not time to panic. >> i am a little bit concerned. i won't dismiss that the flattening of the old curve has gotten ahead of it self at levels.

beforet have much room we get inverted if the fed hikes two or three times more this year. of thethe flattening curve is a concern, something fed officials are paying attention to. fedare hearing talk from president williams and bullard drawing our attention to the flatness of the curve. that weck, do you agree get an inverted yield curve? jack: i only get worried if it gets inverted a lot. bits isreally think 10 out of the range. i am not too worried about it. lisa: i'm trying to square the flattening yield curve with an increase in expectations. we have seen it climb so much this week in particular. can you make sense of this? are we seeing the hints of bad

inflation? things like gas and rent and things like that creeping higher even the wages are not? or is this true growth? subadra: inflation is expected to go up in march and april of this year because of the base effect. it is a tale of two halves. the first half, inflation is expected to go up mechanically because of base effect, but the second half, things like rent and shuttle cost will weigh on inflation and you see a cooling-off in the second half. that will eventually determine if the fed can raise rates after september. lisa: do you agree? inflation expectations have been pushed by the oil prices. that tends to be a high explainer when it is noise more than anything else. i think things come back into line later on. lisa: ian, because you are in london, i want to talk about the european inflation data that is continually underwhelming us.

do you see that we are seeing some sort of possible peak growth in the eurozone? ian: i think that has been a concern from mario draghi, and what we heard from mark carney overnight is that some of this has been a bit weaker than expected. a lot of expectations are that we start to see the data improve as we go through the second quarter. i think the reality is when you look at the ecb and the single mandate, inflation is low and maybe if you squint, it is on an upward trajectory, but it is still well below where the ecb would like it. it is not being helped by the strength of the euro. there is a very fine balancing act to make sure the euro doesn't strengthen too much, otherwise the inflation yield will come back down and they will not be able to start normalizing policy. lisa: sticking in the city, a question from a viewer

wondering, given the flatness of the british yield curve, will we see the likelihood of a lower rate than in the u.s.? do you think that is the case? ian: that is fairly likely. the u.k. has a fair amount of headwinds facing it in the form of brexit. i think that was one of the things mark carney indicated when he walked back the -- expectations of the market, this is from that 85 or 90% earlier this week. it probably does mean lower terminal rates are likely here. to thiswant to shift gap we are seeing between the u.s. and europe, in particular, german yields. we were looking today at how the gap between two-year u.s. and german yields has widened to the most on record. the big question, how long can this go on? what will reconcile this gap and

is it sustainable? subadra: i don't think it is sustainable. you don't see it just in the front-end of the curve, but the backend of the curve. if you look at the 10 year bund spread, it is close to the widest level in history. from overseastug where yield oversees the love. -- low, and that is anchoring the treasury yields. lisa: who has to give? do german yields have to rise? do u.s. yields have to decline? subadra: i think that the bund yields are extraordinarily rich. inflation is slowly but surely picking up even though the forecast from the ecb is calling for just a modest rise over the coming years. i think bond yields are quite risky given the fact that the

european economy is doing much better. it is much higher in europe than it was in the u.s.. jack: you have the queue still going on there, which is messing up the relationships and we need to see that normalized. when that happens, i am not sure. maybe later than originally said, but that needs to happen before you see this stuff normalized. i agree, these levels are out of bounds. have been saying this week after week and since the beginning of february, we have seen the total volume of negative yield in debt actually increase in the world, pushing a lot of investors to the u.s. and the u.s. credit markets in particular. so the ecb doesn't necessarily have to raise rates all that quickly. ian, do you see any likelihood that german bund yields will rise material from here -- materially from here, simply from the gravity of the u.s.? ian: the way i would think about is what happens when having

-- the ecb stops buying bonds? there is one of the big driving factors. the lack of supply of german government bonds. when you see a yield curve that has the two-year government bond in the negative 50's, that has got to normalize. i wouldn't be surprised when we get through the end of this year if we stop having the ecb and that is what we might start to see a normalization within at least the yield curve to get it to a normal standing. but i still don't see bund yields rising dramatically. until the ecb is in play looking to raise rates. we are talking about four basis points priced into the market i this time next year. that is not happening anytime soon. lisa: i just want to finish appear with the move we are seeing this week in 10 year treasury yields. it has been a record market climb up toward the 3% threshold. do think we will cross it? subadra: our forecast for the end of the year is actually 3%.

and itk we get to 3% depends on the trajectory of hikes. the fed will probably hike in june and again in september, but beyond that, i think hikes are a little bit in question. we could temporarily push about 3% but not on a sustained basis. lisa: everybody is sticking with me. lots more coming up. jack flaherty, subadra rajappa, jpmorgantilley from asset management. coming up, the auction block. russia makes a return to the bond market new york. this is "bloomberg real yield." ♪

♪ lisa: i'm lisa abramowicz, in

for jonathan ferro. yield." bloomberg real i want to head to the auction block. russia makes its return, we're talking about that. also, for the first time since 2015, the government sold all andillion rubles of notes offered bids for three times that amount. over in the middle east, like we mentioned in our last show, qatar and saudi arabia raised a combined $23 billion. those sales have helped regional bond sales climb to $46 billion this year. that is the most since 2007. incorporates, the swiss company six-park -- a six-park $4.5 billion deal to help refinance its 43 going dollar takeover by chemchina. order books were more than four times covered.

still with me is jack flaherty from gam, subadra rajappa from societe generale and ian stilley from jpmorgan asset management. i want to start with russia and talk about when bond investors are going to get confidence to go back to that nations that -- nation's capital debt given the conflict with the u.s. and the sanctions. -- nation's capital given the conflict with the u.s. and the sanctions. this was an increase in yields as a buying opportunity. difficult toit is do that at the moment because there is so much uncertainty in the marketplace. russia was a fair trade for a lot of people for numerous reasons. they have a high real yields in the local bonds, oil prices are on the up. central bank is in and easing cycle, but you have those fundamentals removed to the side for the moment because your insight is what is actually going to go on the political side. we are really trading headline risks at the moment. yes, we had a big selloff in russia but if you look at 2014, we are knowing your those yet.

-- nowhere near those yet. there is probably time to me neutral to russia. lisa: you are neutral, what about you, jack? jack: dipping our toes. oil prices remain high. it is not a bad way to be playing the strength in the oil market. subadra: i'm no analyst but from a treasury perspective, what we -- seeing from russia because the currencies have been moving. as far as credit is concerned, -- to me, there is still a lot of uncertainty. continuing to be volatile because of sanctions and the like. i would probably wait to see some stability before entering the market. lisa: meanwhile, in emerging markets, we have an increasing amount of flow into local

currency em. this is basically a huge bet that the dollar will continue to weaken. jack, do you think that this is still a good bet to go into a local currency em or are we seeing some start of a shift here? jack: e.m. is still good. lisa: all right, then. jack: we are seeing really good flows into our e.m. funds. the fundamentals are still pretty strong. hasn't turned negative. there are a lot of fundamentals that say this is the place you should stay. lisa: the income are you going local currency em? ian: i agree. been good ist has russia has been treated idiosyncratically. there is a little spillover to countries like turkey and greece, but if you look at the broad-based e.m. complex, it has ignore the russia story and that is because the fundamental are so strong. you have strong global growth. you have china doing well. you have oil prices on the up,

so actually, those high real yields you see a lot of the places in the emerging markets are looking attractive to people. i would agree with that. lisa: i want to shift to specific corporations. i know general electric has been one of the beaten up children in the equity markets. now they came out with earnings that weren't terrible and people are rethinking their sales and going back into the general electric. i should say ge. they are currently said to be in talks to unload their rail business. jack, are you buying general electric? do think there is opportunity here? jack: we are not doing any general electric right now, there are so many moving pieces. i would love to see them do some spinoffs and breakups that you could put your arms around some boxes and say you want to get involved. right now, we are just watching with interest. ian: we are looking at the corporation as a whole and we are favoring credits in general. these are deftly subordinated credit.

the high-yield market is where we would see the value. we have the spreads the compensate you for the expected default rates. broad-based, i would say yes, credit looks good to us. thinkreally quick, do you that junk bonds in the u.s. are overbought at this point. would you sell? ian: that is a great question because what we're seeing is that we are seeing spreads since the financial crisis. we are down at the levels we saw in january. that is not to say they can't go lower and if you go back to 2007, they were trading with a 200 handle. we could see them grind lower. but you might see a little bit of stability at these levels. where i would say there is an opportunity is in the european high-yield complex because that hasn't rebounded to the same extent as the u.s. that hasn't seen demand over the last couple of weeks. lisa: thank you so much, more coming up. jack flaherty from gam, subadra rajappa from societe generale, and ian steely from jpmorgan

asset management. let's get a market check on where bonds have been this week. 10 year yield climbed back up to the 2.95% pain point. reaching the highs of the year, two years also rising. really, that 10 year yield is where you are seeing things climb. we have more coming up. this is bloomberg. ♪

♪ bromwich in for jonathan ferro. this is "bloomberg real yield." time for the final spread. over the next week, there will be a slew of earnings, especially in tech. you will have rate decisions from the ecb and boj. the white house by emmanuel macron and angela merkel. north and south korea hold a historic summit. still with me is jack flaherty from gam, subadra rajappa from societe generale, ian stealey

from jpmorgan asset management as well. i want to start with some rather surprising words from mario draghi today when he was speaking at the ims. he says notwithstanding the latest economic indicators that suggest that the growth cycle may have peaked, the momentum is expected to continue. his suggestion is that growth may have peaked in the eurozone sent the euros a -- euro tanking and yields lower in the euro region. what do you make of this end what guidance do think we will get next week? ian: there will be some concern about how the data reacted. if you look at the pmi data, they were just being too optimistic. at some point, they were pointing to eurozone growth to 2.5 or 4%. they have come down to more reasonable levels and we are looking at 1.5% to 2% growth.

i think what is going to be critical would do the pmi's that come out of the eurozone next week and let's see if they stabilize to some extent. if we do continue to grind down, i think it would be a defensive -- big concern from the mario draghi. -- for mario draghi. i think we have been told that they are not going to mention when we are seeing the bond purchases or the framework for that until the june or july meeting. i guess he is going to have to fend off quite a few questions regarding the slowdown in growth and whether it is here to stay or whether we will rebound back again. lisa: this raises some really serious questions. if we are seeing the peak of european growth and ecb cannot hike without disturbing the economy, what does that mean as far as their ammunition in another cycle? and frankly, whether we might see something more like stiflation in there. -- the eurozone? subadra: that is a good question because if you look at the growth, even in the u.s., the

first quarter it slowed down. i think most street economists have an optimistic forecast for growth in the u.s.. about 2.5%. we are expecting growth below 2.5% for 2018. i think that once the economy starts to slow down -- and we are a very global economy, and once the u.s. starts to slow down and according to mr. draghi comments, you have concern about european growth, i think that you're going to start seeing spillover and slowdown in global growth. i don't think that one economy is isolated. it is what happens in the u.s. and we think that the economy could go into a recession in late 2019 or early 2020. under the circumstances, i see the ecb being very cautious. in its monetary policy stance. lisa: jack, do think that the ecb will ever hike rates? jack: yes i do.

lisa: when do you think they will? jack: not for a while. i think that ian described this correctly. people got too excited too much. the expectations group more than they should have. i don't think the growth has peaked, i think peoples expectations have peaked for the short term. you have to realize there is a trend and volatility around the trend. i think the trend is still in tech. lisa: is time for the final round. which would you rather by -- buy? hold high-yield or , investment grade? jack: high-yield. subadra: high-yield. ian: high-yield. lisa: which would you rather on? -- own, two-year or 30 year treasuries? ian: 30 year. subadra: two-year. jack: 30 year. lisa: final question, when does

the u.s. yield curve invert? jack: soon. subadra: i don't think the yield curve invert's in the cycle. ian: back end of this year, early next year. lisa: my sincere thanks to jack flaherty from gam, subadra rajappa from societe generale, and ian stealey from jpmorgan asset management. it forw york, that does us. we will see you next friday at 1:00 p.m. new york time, 6:00 p.m. in london back with jonathan ferro. from new york, this is "bloomberg real yield." ♪

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