lisa: from new york city for our viewers note wide -- worldwide, i am lisa abramowicz, in for jonathan ferro, with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ lisa: coming up, as the yield curve flattens, it may be time to start worrying about stagflation. and after a roaring rally, it is now the time to sell junk bonds. we start with the big issue -- the treasury yield curve is closer to inverting. >> the flattening of the yield

curve we see is so far a normal part of the process. the fed is raising interest rates, long rates have gone up somewhat, but it is totally normal that yield curves get flatter. >> i am not too worried about the flattening we have seen. it is a normal development. if it gets inverted, that is a different story. >> certainly, we are worried about the yield curve flattening, especially if it is a signal of future recessions. but we do not see this in the near term, because we see the synchronized global recovery. >> let's not get carried away. it is not unusual, early in the tightening cycle to see a flattening, simply because the front-end of the curve rises faster than the long end. what i'm looking at is the u.s. -- by 30 basis points and they believe growth is gearing up, which is good news. lisa: the big message is stop freaking out. joining me at the table, this is the head of u.s. rate strategy. plus, coming to us from london

is ian steely, fixed income portfolio manager at jpmorgan asset management. e.m., i want to start with you. when do we start to worry? everyone seems to be so keen on dismissing the flattening yield curve ian: i think it is -- yield curve? ian: it is interesting because when you typically do see is that this has led to. i think what we will see is a few months when we hang around these low levels of yield curves. that will happen as it moves down toward zero, but when it hits zero, that does not mean that they are going straight to recession. if you look at the past couple of cycles, it could be a couple of years until we go into recession after we hit zero. i think for the here and now, it is not time to panic. subadra: i am a little bit concerned. i'm not going to dismiss the fact that the flattening yield

curve has gotten a little ahead of its elf at current levels. we do not have much room before we get too flat or inverted if the fed hikes more this year. that is something that fed officials are paying attention to. you are hearing talk from san francisco fed president williams as well as bullard, drawing attention to the flattening of the curve. lisa: jack, do you agree? jack: i only agree if it starts getting inverted by a lot. as again, has been discussed historically, flat slightly, 10 bits or so, is not out of the range. i am not too worried about it either. lisa: i am trying to square the flattening yield curve with the increase in inflation expectations, which we have seen climb quite a bit so far this week in particular. can you make sense of this?

are we seeing the hit -- hint of bad inflation, things like gas and rent creeping higher even though the wages are not? subadra: inflation is expected to go up in march and april of this year because of base effect. the way we look at it is a tale of two halves. inflation is wrong of mechanical because this is weighing on inflation and you should start seeing a cooling off in the second half. that is what i think will eventually determine that the fed can continue to raise rates after september. lisa: do you agree? jack: i think inflation expectations have been pushed by the oil price. if you look and see what the correlation was, it seems to be a high explainer when it is more noise than anything else. i agree that things come back into alignment on. lisa: ian, because you are in

london, i want to talk about european inflation data that is underwhelming us. do you agree with the ecb president, that we are may be seeing some sort of possible peak growth in the eurozone? ian: i think that has been a big concern for mario draghi. we heard from mark carney overnight that some of the economic data in the first quarter has been weaker than expected. it has been a harsh winter in europe, and a lot of expectations are that we start to see the data improve as we go through the second quarter. and in the second half of the year. i think the reality is when you look at the ecb and the single mandate, if inflation is low and yes, if you squint, it is on an upward trajectory, but it is still well below where the ecb would like it to be. it is not being helped by the strength of the euro and the pastor affect. i think they had a very fine balance act to make sure that the euro doesn't strengthen too much. otherwise the inflation level 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 much lower terminal rate than, say, in the u.s.? do you think that is the case? iain: i think that is fairly likely. the u.k. has a fair amount of headwinds facing it in the form of brexit. i think that is one of the things that mark carney was indicating today. when he walked back some of the expectations of the market, the may hike is now only 50-50 priced from 85% or 90% earlier this week. if we go through this transition of the u.k. leaving the european union, it probably does mean lower terminal rates are likely here. lisa: i want to shift to the 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 out to be the most on record. the big question is how long can this go on? subadra, what will reconcile this gap and is it sustainable?

subadra: i don't think it is. you'll see it in the front end of the curve, you see it in the back end of the curve. the back end of the spread is close to the widest levels in history. to me, that is what is keeping treasury you from rising too heavily. you have this tug from overseas were yields overseas are low. that is anchoring the treasury yields. lisa: who has to give? do german yields have to rise? or do treasury bonds have to decline? subadra: i think that the bond yields are extraordinarily rich. inflation is slowly but surely picking up even though the forecast is calling for just a modest rise over the coming years. i think that bond yields -- bund yields are quite richer, 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: i agree. you have the qe that is messing up the relationships. that needs to happen. it needs to normalize, maybe later than originally said, but that needs to happen before you see this stuff normalize. i agree. these levels are way out of balance. lisa: here is the only problem. people have been saying this for week after week after week, and since the beginning of february, we have seen the total volume of negative yielding debt actually increase in the world, pushing a lot of investors investors to the u.s. and the u.s. credit markets in particular. so the ecb does not necessarily have to raise rates all that quickly. iain, do you see any likelihood that german bund yields will rise materially here, just because of the gravity of what is happening in the u.s.?

iain: the way i would think about it is what happens when the ecb stop spying -- stops buying bunds? there is one of the big driving factors. the lack of supply of german government bonds. now more than ever, when you see a yield curve that has gone to the two-year government bond in the -50, that has to normalize. i would not be surprised when we get through the end of this year, if we stop having the ecb buying. that is when we might start to see the normalization in the yield curve to get into a normal standing. but i still do not see bund yields rising dramatically until the ecb is in place, looking to raise rates. from what i have just looks, we are talking about four basis points priced into the market hike by this time next year. that is not happening anytime soon. lisa: i just want to finish up here with the move we have seen this week in 10 year treasury yields. it has been a market climb up toward the 3% threshold. do you think we are going to

cross it? subadra: our forecast for the end of the year is actually 3%. we think we get to 3%, and it really 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: everyone is sticking with me. we have lots more coming up. thanks to all of you. coming up, russia makes a return to the bond market. from new york, this is "bloomberg real yield." ♪

lisa: i'm lisa abramowicz, in for jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now. russia makes its return, we're talking about that. also, since canceling it at auction last week for the first time since 2015, the government sold 10 million rubles of notes and received bids for three times that amount. it also places a $.2 billion -- $3.2 billion of rubles tended. over in the middle east, like we mentioned in our last show, qatar and saudi arabia raised a combined $23 million. these cells have helped complete the no bond sales' climb to more than $46 billion this year. that is the most since 2007. a swiss company had a six part $4.5 billion deal -- $4.5 billion deal to help refinance its $43 billion takeover by chemchina. order books were more than four times covered. still with me are our guests. i want to start with russia and talk about when bond investors are going to get confidence to go back to that nations that given the conflict with the u.s.

and the sanctions. this was an increase in yields as a buying opportunity. iain: i think it is very difficult to do that for this moment. there is so much uncertainty in the marketplace. russia was a favorite trade for a lot of people for numerous reasons. they had a high real yield and local bonds, oil prices are on the up, the central bank was an easing cycle. but i you have those fundamentals moved to the side for a moment because of your inside of what -- your insight of what is happening on the

political side is fairly limited. we are trading headline risks at the moment. yes, we have had a big selloff in russia, but if you look at the levels in 2014, we are nowhere near those yet. there could still be a lot of pain here. it is time to be neutral to russia. lisa: so you are neutral. jack, what about you? jack: dipping our toes. lisa: really? jack: yeah. it is about oil. oil prices remain high. it is not a bad way to be playing the strength in the oil market. lisa: subadra? subadra: i'm no credit analyst, but from a treasury perspective, what we are seeing from russia is selling of treasuries because the currency has been moving. as far as credit is concerned, i think that to me, there is 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. lisa: meanwhile, in emerging markets, we do have an increasing amount of flow into local currency, e.m.. 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 e.m., or are we seeing some start of a shift here? jack: it is still good. [laughter] lisa: all right then. jack: we are seeing really good flows into rem funds. there are actually a lot of fundamentals that say this is a place you should stay. lisa: iain, are you buying e.m.? iain: i fully agree. russia has been treated very's incredibly. if you look at countries like turkey, which have the links, but if you look at the whole broad-based e.m. complex, it ignores the russian story. and that is because the fundamentals 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 yield you see in a lot of places in the emerging markets are looking attractive. i would agree with that. lisa: i want to shift to specific corporations. general electric had been one of the beaten up children in the equity markets. now they came out with earnings that weren't absolutely terrible, and people are rethinking their sales and going back into the general electric. i should say ge. they are currently in talks to unload its rail business. are you buying general electric? do you 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 can then put some arms around some boxes and say you want to get involved. right now, we are just watching with interest. lisa: iain? iain: we are looking at the corporation as a whole and

definitely favoring credit in general. these are definitely subordinated credit. so the high-yield market is where we would see the value. we have the spreads the compensate you for the expected default rates. so i think broad-based, i would say yes. credit looks good to us. lisa: real quick -- iain, do you think junk bonds look good enough to sell? iain: that is a great question. what we are seeing now is that we are seeing spreads at the tightest since the financial crisis. we are down at the levels we saw in january. that is not to say they can't go lower. if you go pre-financial crisis, they were trading with a 200 handle. we could see them grind lower. i think you will 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 has not rebounded to the same extent as the u.s. that hasn't seen the same demand over the last couple of weeks.

lisa: jack flaherty, iain stealey, and sumatra -- the yields are higher, the 10 year yields are coming back up to that 2.9% pain point. reaching the highs of the year, two years also rising. really, that 10 year yield, that is where you are seeing things climb. we have more coming up. this is bloomberg. ♪

lisa: i'm lisa abramowicz, in for jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up over the next week, there will be a slew of earnings, especially in tech, but you also have rate decision from the ecb and the doj. visits to the white house by emmanuel macron and angela merkel, and north and south korea hold a historic summit. still with me are our guests. i want to start with some rather surprising words from mario draghi today when he was

speaking at the imf. he says, notwithstanding the latest economic indicators, which suggests that the growth cycle may have peaked, the momentum is expected to continue. his suggestion is that growth might have peaked in the eurozone since the euro tanking and sent yields lower as well in the euro region. iain, what do you make of this and what guidance do you think iain: iain: we will get next week? -- we will get next week? iain: they will be slightly concerned about how the data reacted over the first quarter. at some point, they were pointing to 2.5% or 4%. that now come down to more reasonable levels. i think we are looking at 1.5% to 2% growth. i think what is going to be critical was if the pmi's that

come out of the eurozone next week and see if we stabilize to some extent. if we do continue to grind down, i think it would be a big concern for mario draghi. i think we have been told that we are not going to mention when we are seeing the bond purchases or the framework for that until the june or even the july meeting. i think he will 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: subadra, this raises some really serious questions, write? if we are seeing the peak of european growth and the ecb cannot hike without disturbing the economy, what does that mean, as far as the ammunition in another cycle, or we might see something a little more like

stagflation in the zone? subadra: that is a very good question. if you look at growth, even in the u.s., the first quarter it slow down. i think most 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, in our very global economy -- once the u.s. starts to slow down, according to mr. draghi's comments, you have this concern about european growth. i think that you're going to start seeing a spillover and slowdown in global growth. i don't think that one economy is -- 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. lisa: jack, do you think that the ecb will ever hike rates? jack: yes i do. lisa: when do you think they will?

jack: oh gosh, not for a while. i think that iain described this correctly. people got excited a little too much. the expectations grew more than they should have. i think people's expectations have peaked for the short-term. i think there is the trend, and the volatility around the trend. i think the trend is still intact. lisa: it is time for rapidfire, the final round. which would you rather buy? buy or hold over the next quarter, high yields or investment grade? iain: high-yield. subadra: probably high-yield. jack: high-yield, oh my goodness. [laughter] lisa: which would you rather own right now? two-year or 30 year treasury's? iain: 30 year. subadra: the two-year looks attractive. jack: two-year.

lisa: and when does the u.s. yield curve invert? jack? jack: soon. subadra: i do not think it inverts in the cycle. iain: back into this year and early next year. lisa: my sincere thanks to jack flaherty, subadra rajappa, and iain stealey. we will see you at 6:00 p.m. in london, back with jonathan ferro. from new york, this is bloomberg real yield. ♪

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