jonathan: from new york city for our viewers worldwide, i am jonathan ferro, with 30 minutes dedicated to fixed income. this is "bloomberg: real yield." ♪ jonathan: coming up, inflation building. gettingessures finally back to fed targets. and netflix upsizing their bond offerings this week. and a consensus trade in e.m. the big issue of 10 year yield getting back to 3%. enough toeshold is

give -- get people's attention, but i don't think it is a bad sign by itself. >> it is more psychological than anything else. >> we think the path is higher, but it will be a slow pace, and could probably get up to that 3.25% level. >> we have been saying we expect a halffore two and percent, but the market is coming to that expectation. buts at a reasonable pace, if the reasoning is because of growth, it doesn't mean a debacle. this could bring forward the eventual recession. that is my main fear about higher rates. if the fed says they are going to raise two more times to treasury would not

tell you at 3% they are pricing that in. the short side of the curve is the big story. jonathan: around the table in new york is jack mcintyre, plus, comingves, to us from pasadena, california, bonnie wongtrakool. it is great to have you with me. everyone is saying, forget about the 10 year. two-year treasuries, when you're treasuries, is where we are seeing the realtor pricing -- treasuries, is where we are seeing the real repricing. george: it hurts to see higher rates on the back end. for a long time people thought you would get an environment where the fed thought long-term rates would move.

-- wouldn't move. it is good to see long-term rates going up. jonathan: bonnie, six month builds are where 10 year treasuries were in september. two-year notes are where 10 year treasuries were at the beginning of january. nie: the whole treasury curve has moved by 60 basis points year to date. what is the market pricing at? the market is in line with the fed this year, in terms of how many hikes the fed will do. giveneems reasonable, where the unemployment rate is and how growth is coming in. thatyou look farther out, is where it gets interesting. if you look at the five year yield, five-year sobered, the market is pricing in at 3.2%.

if you compare that to the fed, their long run rate is two and 7/8. the market is more hawkish than the fed, which is what we have not seen in quite some time. this makes the front and book interesting for the first time in a long time. look interesting for the first time in a long time. jonathan: what do you make of the spread between the two? i think the curve is telling us how flat it is. if the fed is not behind the curve, the terminal rate at the endpoint of this tightening cycle is less than what the fed thanks. inks.at the fed thank this move is significant. the markets tend to focus on the adverse impact. gerorge: we don't see a huge

lack yet. -- huge lag yet. the rate drag will be offset by the fiscal stimulus. it will be hard to decipher what is happening. do fiscal stimulus and have higher rates to get investors to buy the debt. we are in this vicious circle. pcethan: last week, reading bubbling away, payrolls going into inflation wage growth. what do you make of this resurgent inflation story over the last month? bonnie: we are not surprised to see inflation numbers moving up this year. we know energy costs have been going up and i eat lots of these effects are rolling up -- a lot of these effects are rolling up. team hasrch

highlighted wage pressures in certain sectors. we are aware of that trend. where does it end? is, the fedion is comfortable with it in terms of wage inflation. they would like to see it to reach 3%, but it is not there yet. there is anront, expectation it will rise going into the middle of the year. is it going to overshoot the fed target? that we think is not in the cards, given the structural changes to the economy. out into af we broke narrow range that includes a three handle, not something that is going to explode toward four? >> four is a tall order to achieve. but there is upside risk.

embracere starting to the idea that the fed is moving higher. they are unwinding the balance showtt, a number of factors growth should be stronger in the second half. are naturally going to test the three percent, and this been inm bull trend has place since 1987, and every time we touch it it means more damage market, but we think we will stay above three. i have been asking for months on this program whether that two-year spread shows treasuries continuing to get wider. situation, at the

can treasuries decouple from europe? >> we in the u.s. are operating with our own devices. that will remain the case and the fed is not going to blink. the moment we get the sense -- the -- the flood is fed is blinking, rates will reconverge. euro has had a good move. it has been slowing the european economy. we are on different business cycles between what is going on in the u.s. and europe. jonathan: this takes us onto the next leg, around emerging markets. people have been very comfortable with their team -0-

e.m. exposure because the dollar has stabilized around weak levels. story has changed in the last week. >> it is hard to tell what is going to happen in a month from now. the currency is going to have countertrend moves. market has shifted their focus a little bit more toward relativel monetary polic. i can see the dollar doing better here than the euro and the yen. we still think emerging-market currencies have value. 2011.ave lagged since jonathan: i will go back to the two-year spread. this should mean much further toward the front of the curve -- a stronger dollar story that

hasn't emerge. the dollar strengthens, the consensus em trade comes into real pressure -- that is the worry. bonnie: we have conviction on emerging-market bonds. we think they offer a want of value. -- a lot of value. if you look at the spread between developed markets and emerging markets really guilt, it is that a 10 year wide. the valuations are compensating you for some rest. we are cognizant of the currency risk. wars,are risks from trade but we still think that the emerging markets offer the best value in the market right now. bonnie is sticking with me, alongside jack and george. next up, the auction block.

becomingk the latest company with negative cash flow to tap into investor desperation. that is coming up next. this is "bloomberg: real yield." ♪

♪ i am jonathan ferro. this is "bloomberg: real yield." 274 billion dollars worth of treasuries were auctioned just this week. the two-year and options saw the highest yields since 2008. netflix tapped the high-yield millionselling 1.9 dollars worth of bonds in its largest ever to nominated offering.

the real headliner of the week for so many people, wework, selling $702 million of bonds in its first ever offering, increasing the size of the deal by 40%. softbank sold unsecured bonds, yield going 7.85%. we are talking to bonnie, jack, and george. why did the credit rating agency struggle so much with this issue? it was rated double b-, b positive, and triple c. no one knew what to do with this. ie: it is always difficult when you have projections for growth and cash going forward. we have a disruptive business model very different from what

is traditionally seen in the markets. ratings agencies had some difficulty taking into that. this market, you have to roll up your sleeves and do your homework to understand the credits. exception.no in the primary markets, and upside offering. demand was still there. you see the positives from that? >> capital is biased toward searching appealed. -- searching out yeild. out y the global economy isi still doing well and the fed is tightening. eld. we still have that risk neutral seeking environment. a lot of capital on the sideline is going to be put to work. jonathan: when you think about the cost of downside protection,

the fact that you can get significant yield at the front end of the treasury curve -- brought into the occasion of where you want to allocate the capital. somewhatyields are competitive. if you have a portfolio clearly screwed one direction, it may be some time to get a little bit of assurance. what about the incentive to take duration risk? it is not really there. the incentive to take credit where ishe moment -- the incentive to pick up on that risk? bonnie: we have taken off some of the curve flattening or -- fl we think longer dated treasuries to provide a good balance to risk in your portfolio. treasuries still remains the

deepest and most liquid market when there is a risk off move, investors are going to buy there. we maintain that as part of our corporate portfolio diversification. i wonder whether outperformance with insulation against the market can continue. bonnie: part of it is due to duration. c borrowers will have shorter duration bonds and others that are able to get someone of a higher rating. the move we saw down earlier this year, i think a lot of investors were trying to sell what they could. that was higher duration and higher-quality issuers. if we think there is another cs willn, that triple probably underperform, that we know there are opportunities within that.

we looking at it on a case-by-case basis. jonathan: you look at the , if you look at credit alone, you wouldn't see it, would you? like a lot of volatility. if you zoom out and look at 3-5 years, i think all of these things are true. cash alternatives are a great story. hardnk investors have a time moving around the portfolios quickly. pc the high-yield cbs is winding. people are looking for assurance. there hasn't been much high-yield supply coming into the market. is that a factor as well? there are supply and demand

dynamics that certainly influence where the spreads are. valuationind a huge in credit. we are skewed more toward the emerging world. if you are looking for that yielded better potential, i would put more money into that. jonathan: give me more color on the timer if you think about emerging markets at the moment. >> a three year time horizon. it has lagged since 2011. this will be a multiyear cycle. jonathan: jack and george and bonnie are sticking with me. market check on where bonds have been through the week. the yields are about at the front end. the two-year is climbing back up. this is all unchanged despite

the media coverage of the 10 year yield. ahead, the final spread and the week ahead, featuring a decision from the fed and the u.s. jobs report. "bloomberg: real yield." ♪ ♪

jonathan: i am jonathan ferro. this is "bloomberg: real yield." we will get another round of earnings with the final spread, and the milken institute will host the annual conference, and we get the u.s. jobs report and that treasury announcement on the same day. with us is bonnie, jack, and george. george, the, treasury announcement could be

the most important thing on fed day. >> there could be a big increase in supply. if they will continue in the quarters ahead, that might weigh on the curve more than anything. >> we know there is a time of supply. -- ton of supply. i think the starting point is we have a lot of supply to digest. but where is it going to come, in the front end of the curve? it could have some curve implications. jonathan: is that what you are looking at more specifically, george? >> there is more front and paper. aderstanding what happens for woman -- long-term issuance is what the market is looking for. >> you are right about the dollar strengthening. these treasury yields look pretty juicy. that is a pretty good return. jonathan: bonnie, what do you

make of that? bonnie: i agree a lot of it has been priced -- there is that expectation we have to fund the fiscal stimulus. it is attractive to overseas investors here even though currency has half-risen. with these higher yields, it is attractive. we have heard that from overseas investors. there is going to be support for the market. we shouldn't forget about the structural -- the constant demand for longer data bonds in the united states, particularly going into the end of the year. they are trying to get their contributions in before the respectability decreases on september 15. putting all of that together, you have decent technicals for u.s. dollar assets. >> there has been concerns about the foreign bid bidding these auctions out. are you concerned?

>> there has been optics around dollar funding, what is creating .n opportunity you can -- by treasuries at a much higher yield level, but i think the foreigners are still going to be more discriminate. jonathan: i want to wrap up the program and look ahead to next week. byyear treasuries, is 3% a or is there more yield pickup to come? jack: you start nibbling on treasuries. george: more to come. bonnie: buy. cracks in em, a buying opportunity or a brewing pain trade? jack: buying opportunity, be selective. george: buying. bonnie: buy. teslaan: wework or

through to the year end, similar maturity? jack: pass? george: can we go to other tech companies? bonnie: i would say we work. jonathan: great to have you with me. bonnieeorge, and wongtrakool. coming up, the president and angela merkel will hold a joint news conference at 1:50 new york , 6:50 london time. coverage right here on bloomberg. we will see you next friday at 1 p.m. new york time. this is bloomberg. ♪

mark: hundreds of palestinian converged on the gaza strip's and some fidelity's have

been reported in a violent incident in more than five weeks of protest. the spokesman for the un's human rights office sister in the past four weeks, 42 palestinians have been killed and over 5500 others injured. >> 35 of those killed, taking part in demonstrations, as part "great march of return." most have been unarmed and were not presenting an imminent threat to the iff at the time of their killing or injuries. no israeli casualties have been reported. mark: israelis military are under orders to charge what it calls instigators, but warns anyone approaching or tries to damage a fence