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, inflation building. price pressures finally getting back toward the feds target. upsizing bond offerings this week. a resurgent dollar. tracks appear in em. 10 year yield getting back to 3%. >> i think the 3% threshold is enough to get people's attention.

by itself, i don't think it is necessarily a bad sign. >> i think it is more psychological than anything else. >> it is all about case and have. -- about pace and path. we think we can get up to the 3.25% level. it will be hard to break and stay above that this year. >> we have been consistently saying we expect 3.5% before 2.5%. is it is a measured reasonable pace, and if the reasoning is because of growth, it doesn't mean a debacle. >> if the u.s. 10 year yield gets into the high threes, that is when it acts as a drag on the economy and brings it into recession. >> if the fed says they are going to raise at least two or three more times, two 2019, the 10 year treasury would not tell you they are pricing that in. i think the short side of the curve is the big story here. jonathan: joining me around the

table in new york, a portfolio at brandywine investment management. it is grate to have you all with me. foremost fixed income investors, they forget about the 10 year. foremost fixed incometwo-year, , that is where we have seen a real price fix. >> we can't dismiss long-term rates either. in general, credit has much longer duration profile. it hurts to see higher rates on the back end. for a long time people thought you would get an environment where short-term and long-term rates wouldn't move, the curve would fully flattened like a pancake. jonathan: let's start with the first piece of the puzzle and

work our way through the curve. it's interesting to point out six your bills or where treasuries were in september, and two-year notes are yielding what treasuries were in the beginning of january. >> the whole treasury move has moved by 60 basis points today. you have to see what the market is pricing in. essentially this year the market is in line with defend -- in line with the fed. that seems reasonable given where the unemployment rate is. when you look further out, to see the market pricing in is where it that gets interesting. if you look at the five year yield five years forward, the market is pricing in close to 3.2%. when you look at the fed, their is where it gets interesting. moreet rate is

hawkish. lookmakes the front end interesting for the first time in a long time. jonathan: let's talk about that divergence between what the fed and thein the long-term markets. what do you think between the two? george: i think the curve is telling us maybe the terminal rate of this tightening cycle is less than what the fed thinks right now. i think it is the rate of change. 10 year yields have had roughly 100 basis points move in six months. that is a pretty significant move. the markets have to focus on some adverse impacts. >> everything operates with a huge lag, and we are entering into a period where any sort of weakness from a rate drag will be offset by this fiscal

stimulus. it will be hard to see what is happening. you need the debt to do the fiscal stimulus, and you need to entice investors to buy the debt. emerged in story has the last week, the employment cost index in the united states starting to bubble up. inflation wage growth figure everyone will be focusing on -- what do you make of this story over the last month, including the rally we are seeing in commodities as well? we are not surprised to see inflation numbers moving up this year. that is something we expected coming into the year. we know energy costs are going up. we are not surprised by that move in inflation, and also in wages. hascredit research team highlighted wage pressures. we are aware of that trend ongoing. it is a question of where does it end?

comfortableretty with wage inflation. they would like to see it region 3%. -- it reach 3%. it is not there yet. front, there is an expectation it will rise into the middle of the year, perhaps stay there, but is it going to overshoot the fed's target? we don't think that is in the cards, given structural changes to the economy. jonathan: if we had just broken notinto a new narrow range, something that will explode through 3%. george: 4% is a tall order to achieve anytime soon. there is upside risk. we are only starting to embrace this idea inflation is moving higher in the direction the fed wants.

could the fed something that will explode they really can't. they really can't. they are unwinding the balance sheet. we think we will go to 325 with upside risk. it will happen over the course of the summer. we will naturally test 3%. bull trendg-term that has been in place since the 1987 stock market crash. every time we touch it, it means more damage for the equity market than the fixed income markets. we think we will consolidate, but we will make a run about 3%. jonathan: can any time we have seen serious -- in the meantime we have seen serious divergence. i have been asking whether that two-year things back? spread in treasuries continues to get wider. now we are through 300 basis points. income, when you

look at the situation, can treasuries decouple from europe? george: to a certain extent, we in the u.s. are operating on our own devices. that will remain the case, and the fed is not going to blink. the moment we get the sense the fed income, when you is blinking, that is when u.s. and european rates reconvert. >> every time mario draghi speaks, at his core, he is dovish, and i think he will continue to the that way. the euro has had a pretty good move. it has been slowing the european economy. they are on different business cycles between what is going on in the u.s. and europe, and that is reflected in treasury yields. thethan: that takes us to next like of the conversation around emerging markets. there are people very comfortable with their p.m. exposure, currency -- em debt.ure, currency

story changed over the last few days. jack: the point here is currencies can have countertrend moves. the currency markets have shifted their focus is little bit more toward relative monetary policy. the fed is well on a tightening cycle. i could see the dollar doing better than the euro or the yen. we still think em currencies have value. em currenciesem currencies havee 2011. this will not be a one, two-year phenomena, where they roll over and die. jonathan: i go back to the two-year sprint, bonds versus treasuries. that should mean ultimately toward the front of the curve, it should mean a stronger dollar is blinking, thatstory has not.

strengthens, and the consensus em trade comes under real pressure. what do you think of that sort of scenario right now, strengthe consensus em bonnie? bonnie: we have a lot of conviction on emerging markets bond. we think they offer a lot of value. in this particular cycle, i think emerging markets are starting from a much better point, in terms of currency valuations and real yields. when you look at the spread between developing market real a 10 year wide. we are cognizant of the currency risk. there is obviously trade risk from trade wars. we still think em offers the best value in the market right now. bonnie sticking along with me alongside george. the latest company with negative cash flow to tap into investor's desperation for junk debt on a

decent yield. that is coming up next. this is "bloomberg: real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg: real yield." i want to head to the auction block, where $274 billion worth of treasuries were auctioned this week alone. the highest yield since 2010, while the five and two-year option saw the highest since 2008. the focus on junk bonds, netflix cap the market -- tapped the market in its largest ever dollar-denominated offering, up from $1.5 billion. lossmaking first ever

offering, increasing the size of the deal by 40%. yield 7.875%. jack, george, and bonnie. bonnie, i want to begin with you. why did the credit rating agency struggle so much with this issue? it was rated the minus by s&p, and ccc by moody's. they did not know what to do with this. bonnie: it is difficult when you have issuers at negative cash flow. so in addition to that, we have a disruptive business model that is very different from what is traditionally seen in the market. rating agencies had difficulty in digging into that. this market, just like any market, you have to roll up your

sleeves and do your homework to understand credit. wework was no exception. jonathan: in the secondary market, this is looking softer in the initial trading. in the primary market, an upside is offering, demand was still there. bonnie: the positives is capital is still biased toward searching out yield. there is still this broad-based global growth environment. is stillmaybe it is not as strot was at the end of last year, but of the global economy is doing well. there is not as much overhang. inflation is moving higher and the fed is tightening, but we are still going to be in that risk neutral seeking environment. therefore there is a lot of capital on the sidelines. jonathan: do you think we are de-r de-risk one you

look at down risk protection and you can get vanilla yields at the front yields at the front end the treasury curve, 2.5%? bonnie: it -- jack: it certainly has to be brought into the equation. if you have a portfolio that is clearly skewed one direction, is time to getit insurance and b is time to get insurance and buy high-quality duration. jonathan: the incentive to take duration risk not really there, the incentive to take credit isk, given how high-yield relative to investment risk. bonnie: we have taken off some flattening, given what has been priced into the front end. we think longer treasuries provide a good ballast to risking your portfolio. treasuries remain the most deepest and liquid market when there is a risk off move, investors are going to buy there. we maintain that as a core part

of diversification. jonathan: ccc offered you some insulation against the market action elsewhere. i wonder if that can continue, bonnie. bonnie: part of it is due to duration. for ccc borrowers, they will have shorter duration bonds then the higher issuers who get a higher rating. it is hard to say it is just from market sentiment. in the move that we saw earlier this year, i think a lot of investors were trying what they could, which was higher duration, higher-quality issuers. at western, we have been de-risking. we think if there is another move down, ccc's will probably underperformed. we know there are other opportunities in that. we look at that on a case-by-case basis. jonathan: we have seen some widening in high-yield. you look at the picture investors give you over the past

months. it seems volatile and quite rough. you would not see it, when you? --it seems volatile would you? on the chart. using about five years, things are very narrow and wound up. your point on cash as an story.tive is a great story. investors have a hard time moving portfolios around quickly. staying tight. people are looking for insurance, they just can't afford it all at once. jonathan: there has not been much high-yield supply coming into the market. is that a factor as well? jonathan: there has not been >> there is supply and demand dynamics influencing where yields are spread, that sort of thing. we don't find a huge valuation

in credit. we are skewed more toward the emerging world. i think that is longer-term. if you are looking for better yield and long-term potential, i look more toward emerging markets. jonathan: give me more color on the long-term horizon in em at the moment. jack: i am thinking a three-year time horizon. it has lagged since 2011. this is going to be a multiyear cycle. guests sticking alongside me. i want to give you a market four basis sticking alongside me. i want to give you a market check on bonds for the week. yields at the front end, the 2-year note climbingpoints. flatteningt of curve with the 30 year yield curve coming in at 3.13. the week ahead featuring a

decision from the fed and the u.s. jobs report. it is mail ready. this is "bloomberg: real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg: real yield." it's time for the final spread. in the next week we will get a final round of earnings. hostilk and institute will the annual conference. the fed deciding and the u.s. jobs report, and treasury refunding announcement coming on the same day. your view, george, that could be the more important thing on fed day, not the fed decision itself, but the treasury refunding announcement. george: we will be all teed up. if it is clear there is a big increase in supply and they have

to do so in quarters ahead, that more than anything the fed say than anything the fed says. jack: we know there is a ton of supply. i think the market -- the starting point is, we have a lot of supply to digest. the key is, where is it going to come from? is it going to come from the front end of the curve? we know there is a time of supply on there. the key is, where is it going to come from? is it going to come from the front end of the curve? we know there is a time of supply on there. jonathan: is that where you are looking more specifically, where on the curve it falls? george: more understanding what happens for long-term issuance. jack: i would say if you are right about the dollar, you are a foreign investor,the key is, o come from? those treasury yields look pretty juicy. that is a pretty good return. jonathan: bonnie, what do you make of that treasury issuance we will hear about next week? bonnie: i agree a lot of it has been priced in already.

there is talk about that we have stimulus.is fiscal think it is attractive to overseas stimulus.i think it is attractive to overseas investors. although currency costs have risen, the higher yields are attractive. we have heard that from overseas general. in i think there will be support for the market. also we should not forget about the structural pension bid here in the united states. there is a very constant demand for longer dated bonds for that community, particularly going into the end of the year. they are trying to get contributions in before deductibility general. i think there will be support for the market. increases december 15. putting that together, you have decent technicals for u.s. dollar assets. jonathan: there have been concerns about the foreign these sitting some of out.ons

is that want to fully hedge. overall the out. is that your concern? george: not so much -- we think there is an opportunity for play. that don't fed is in

to wrap up the program and look at price to wrap up the program and look at price action. i want to get some short, sharp answers. is tenure treasuries a buy,jonae you with me. play. the foreigners are going to be more discriminate about when they come in. jonathan: i want to give you the york, that is it for us. we will see you 6:00 p.m. in london. this was "bloomberg: real yield ." this is bloomberg. ♪

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