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, investors .

the treasury yield curve is close to adverting. >> rates have gone up somewhat. it is totally normal that the yield curve gets flatter. >> i'm not too worried about the flattening we have seen. it is an amount of it. if it is inverted that is a different story. >> certainly we are worried about the curve flattening. we do not see that in the near term. >> let's not get carried away, it is not unusual to see a flattening. the front end of the curve arises faster than the long end. >> the big message perhaps is stop freaking out. joining me at the table in new york is jack flaherty.

plus, coming to us from london is ian steely. in, i want to start with you. when do we start to worry? i think it is an interesting one because what we typically do see as rates move higher is that the yield curve flattens. that is what history tells us. i think what we'll see is a few months where he hanged around is very low levels of yield curves. you hit zero, that does not necessarily mean because straight to recession or . it could well be a few years later the reaction we go into recession. >> i am a little bit concerned. we do not really have much room

before we get to inverted. flattening of the curve is a concern. that is something that officials are paying attention to. there is talk from president williams drawing our attention to the flattening of the curve. >> jack, do you agree? start worrying it gets inverted by a lot. >> really? it has been historically flat . i do not think it is out of the range. i'm not too worried about it. and try to square both a flattening yield curve with the increase of inflation. can you make sense of it?

only we sing hence a bad inflation? things like gas and rent creeping higher even though wages aren't. >> inflation is expected to go up in march and april of this year. the way we look at it is it is a tale of two halves. a half where inflation is expected to go up mechanically. in the second half we think things like rats and shelter costs will start weighing on inflation. you should start seeing some cooling off in the second half. >> do you agree? inflation expectations are been pushed by the oil price right now. it is noise more than anything else. i agree that things will come back into line later on. want to talk about the

european inflation data that is continually underwhelming. what do you make of that? do you agree that, indeed, we are seeing peak growth in the eurozone? >> i think that is a big concern for mario draghi. some of the economic data in the first quarter has been a little bit weaker than expected. it pretty harsh winter over in europe. expectations are that we start to see the data improve as we go through the second quarter. though,the reality is, inflation is low and maybe if you squint it is on an upward trajectory. it is still well below are the ecb would like it to be. i think they have a very fine balancing act to make sure the euro does not strengthen too much. >> ian, always saying the

likelihood of a much lower rate than in the u.s.. you think that is the case? >> the u.k. has a fair amount of headwinds facing it in the form it.exitb --rex like as we go through this transition u.k. leaving the european union, it probably does make lower terminal rates are likely here. >> i want to shift with this gap we are seeing between the u.s. and europe, in particular german yields. we're looking today how the gap between u.s. and german yields has actually widened out. the big question is how long can this go on?

what will reconcile this gap? is it sustainable? >> i do not think it is sustainable. you're not just seeing it in the front end of the curve but also the back end of the curve. it is that close to the widest level in history. to me that is what is keeping yields from rising. yields overseas are low and that is anchoring it. >> to german yields have to rise or to u.s. yields have to decline? slowly butn is surely starting to pick up, even the forecasts from the ecb are calling for a modest rise over the next coming years. i think that yields are quite and the fact that the european economy is much higher.

>> to you agree? >> basically. you have the qe that is still going on there which is messing up the relationships. we need to see that normalize. when that will happen i'm not quite sure. maybe a little bit later than originally said. that needs to happen before you see the stuff normalize. i agree that these levels are out of bounds. >> here is the only problem. people have been saying this for we have seenweek, the total volume of negative yielding actually increase pushing a lot of investors to the u.s. credit markets. the ecb does not necessarily pull all that quickly in. you see any likelihood that yields will rise materially from here? >> the way i would think about

it is what happens when the ecb stops. that is one of the big driving factors is the lack of supply. is in there every single day effectively distorting the market. surprised when we get to the end of this year and stop having the ecb buying. that is when we might start seeing normalization. i still do not see yields rising dramatically. it is not happening anytime soon. >> i just want to finish a. with the move we have seen this week in 10 year treasury yields. it has been a market climb upwards back towards that 3% threshold. do you think are going to cross it?

end offorecast for the the year is actually 3%. , andink that we get to 3% it really depends on the trajectory of hikes. the feds will probably hike in june and september, but behind that i think hikes are a limited. we could temporarily push above 3%, but not a sustained think. >> everybody is sticking with me. we have lots more coming up. coming up, the auction block. russia makes a return to the bond market. this is bloomberg real yield. ♪

>> i am lisa in for jonathan ferro. this is bloomberg real yield. i want to head to the auction block now. russia makes its return. also, after canceling an auction .ast week, over in the middle east, qatar and saudi arabia raised a combined $23 billion. bond sales have climbed to $46 billion this year. that is the most since 2007. still with me is jack flaherty

and ian steely. with talkingrt about when bond investors are actually going to get confident to go back to that nation's debt given the conflict with the u.s. and the sanctions. in, i want to start with you. as ausing this decline buying opportunity? it is very difficult to do because there's just so much uncertainty in the marketplace. russia was a favorite trade for a lot of people. oil prices are on the up. just gotten the fundamentals moved to the side for a moment. we are really trading headline risk at the moment. levels you at the

have got to back in 2014, we are nowhere near those yet. there could still be a lot of pain there. >> so you are neutral. jack, what about you? >> giving our toes. -- giving our toes. oil prices remain high. analyst but i can say that from a treasury perspective but we are seeing the currency has been moving. concerned,redit is to me there's still a lot of uncertainty. the currency is still continuing to be volatile because of sanctions and the like, so i would probably wait to see some stability before entering the market. >> meanwhile, in emerging markets we do have an increasing

amount of flow into local currency. this is basically a huge bet that the dollar will continue to weaken. jack, d think this is still a good bet to go into local currency em? or we seeing the start of a shift year? >> still good. we are seeing really good flows into em. the fundamentals are still pretty strong. the are a lot of fundamentals that would say this is the place we should stay. >> ian? >> i would fully agree. russia has been treated very idiosyncratically. if you look at the whole broad-based complex, it has really ignored the russian story. that is because the fundamentals are so strong. you have china doing well.

oil prices on the up. those high yields you're seeing in the emerging markets are looking attractive to people. >> i want to shift to specific corporations. i know ge has been one of the beaten up children in the equity markets. now they cannot with earnings that were not terrible and some people are rethinking and possibly going back into ge. it is currently said to be in talks to unload its rail business. are you buying ge? do you think there is some opportunity? >> we are not doing any ge right now. the are so many moving pieces. i would love to see them do some spinoffs and breakups. right now, we are just watching it with interest. >> ian? >> we are looking at the corporation as a whole and the still favoring credits in

general. the high-yield market is where we would really see the value. i think broad-based i would say yes. real quick, you think that junk bonds in the u.s. rsl? that is a great question. over the last couple of days we have seen spreads since the financial crisis. we are pretty much at levels we saw in january. that is not to say they cannot go lower. if you go back to 2007 they were trading at the 200 handle. you might see a little bit of stability at these levels. there is an opportunity within the european high-yield complex. i have not seen the demand over the last couple of weeks. >> bank you so much.

we have more coming up. everyone is sticking with me. let's get a market check on where bonds have been this week. 10 year yields climbing back up at 2.95%. reaching the the highs of the year. two years also rising. really, the 10-year is where we are seeing things climb. we have more coming up. this is bloomberg. ♪

♪ i am lisa in for jonathan ferro. this is bloomberg real yield. time for the final spread. a slewek there will be of earnings, especially in tech. plus be decisions from both the ecb and the boj. north and south korea hold a historic summit. still with me is jack flaherty

and ian staley. with some rather surprising words from mario draghi today when he was speaking at the imf. he said notwithstanding the latest economic indicators which suggests that growth cycle may have peaked, the growth momentum is expected to continue. his suggestion that growth might have peaked in the eurozone sent the euro taking and yields lower as well. what do you make of this? think there's going to be slight concern about how the data reacted in the first quarter. there are actually being a bit too optimistic. a little bit unrealistic. ick now come down to what would say is more reasonable

levels. 1.522% growth. to 2% growth. i cannot really expect much from the ecb. we have basically been told they are not going to mention when you're going to see the end of bond purchases until the june or even july meeting. lisa: this raises some serious questions, right? if the peak of european growth and they cannot hike without disturbing the economy, what does that mean as far as their ammunition? frankly, whether we might see something a little bit more like stagflation in the zone. question, a very good because if you look at growth in

the first quarter it is down. optimistict haven't forecast for growth in the u.s. at about 2%. i think that once the economy starts to slow down, we are very global economy, once the u.s. thiss to slow down concerns european growth. i think you're going to start seeing a spillover. i do not think that one economy is isolated. u.s.nk what happens in the , the economy could go into a recession in late 2019 or early 2020. under the circumstances i do see the ecb being very cautious. lisa: jack, do you think the ecb

will ever hike rates? yes i do. not for a while. people have gotten very excited a little bit too much. so the expectations grew a little bit more than they should have. i do not think growth has peaked. i think people's expectations have peaked the the short term. you have to realize there is a trend and then there is volatility around the trend. i think the trend is still intact. lisa: it is time now for rapidfire. which would you rather buy or hold over the next quarter. high-yield investment grade? ian: high-yield. >> probably high-yield. jack: high-yield. would you rather own right now. two-year or 30 or treasuries? ian: 30 year. >> two-year. jack: two-year.

when does the u.s. curve ¿ jack: soon. >> i do not think it inverts. ian: back end of this year or early next year. flahertynk you to jack and ian staley. from new york, that does it for us. we will see you next friday at 1:00 new york time. from new york, this is bloomberg real yield. ♪

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