jonathan: i'm jonathan ferro with 30 minutes dedicated to fixed income, this is "bloomberg real yield." coming up, a week of unexpected inflation and the yield curve that has flattened since 2007. argentina issued bonds and year -- and look at the former governor in italy. issue, isith a big for present the new 3%? -- 4 percent the new 3%?

>> the fed raises rates more than you expect and on the short force the tenure of, you can easily do with 4% bonds. we are completely in a normal situation. we are getting closer to that state and so certainly about 4% of the u.s. economy could handle it and it's consistent with economic fundamentals. >> there's a catalyst to getting treasuries --ear it's really going to be when the ecb and the bank of japan signal their readiness to change much of the policy. >> u.s. economy can handle 4% yield with the global economy cats. we get this disconnect where if you get softening in the global economy, u.s. yield looks and chief relative everything else that we get huge foreign demand into the u.s. 4% a stuff anytime soon.

-- is tough anytime soon. georgen: joining me is rusnak, lisa hornby, and coming to us from pasadena, california is michael buchanan deputy cio of western asset management. it's great to have you with us. spent the week talking about it and every time i brought it up, i've taken abuse because no one really thinks we are getting to 4%. where's the 4% conversation come from, lisa? hornby: jamie dimon brought it up first. and the head of jpmorgan says that, we have to listen to it. never had tv or the reverse of qe, in turn premium is still negative. central banks are eventually going to be exiting these programs and if that's true, we should be headed to more normal rates. , can we get some more normal rates?

mr. buchanan: anytime the jamie dimon talks, you are smart to listen. interview, to me, he didn't seem like he was predicting 4%, what he was saying was we need to get prepared for the possibility of 4%. we don't see for present happening and we don't think roads or inflation are consistent with that. we have to make sure the client portfolios can withstand that type of shock. jonathan: why struggle with is if the fed has to go quicker, widely forecast this parallel shift in raises of the whole curve is going to lift the federal reserve. mr. rusnak: rates have already gone up 60 basis points and you see a flattening of the yield curve. as far as a 4% 10-year, we'll see that for any time over the near-term but we do think the rates are going to be going up from here, not significantly so.

the religious right difference from overseas is going to hold that down. jonathan: if the federal reserve has to go quicker, is that the base curve? mr. rusnak: that's why we're only causing -- calling for two more rate rises. you've got a very flat yield curve and we do think if the fed moves to quickly they could cause an inversion. jonathan: lisa? ms. hornby: we have to focus on inflation and what other central banks do. other central banks are part of what's keeping this rate market in check and if we see a surprise move out of the doj, let's say, that could change the dynamic here. let'stalk --jonathan: talk about the inflation friend. we had a tiny downside surprise on inflation but it got people excited that we were still in this goldilocks regime. risk appetite is going to remain here to stay because things are going to be ok. is this still goldilocks growth

or are things changing? mr. buchanan: i think depending on what market you are talking about, we do see more of the same. we see growth is probably below consensus, 2% to 2.5% and we think inflation is trending higher, but the fed right now is comfortable where inflation is and jerome powell talked about asymmetry or a symmetric range for what the fomc is predicting around 2%. that tells us at least that they are willing to withstand inflation that goes about 2%. point, thet's a good reaction function of the federal reserve and trying to understand the sensitivity of the fed to and ifinflation prints the federal reserve move which surprises to the upside or is the federal reserve endorsing overshoot to some extent in terms of their communication? they talked about

transitory factors and they were not with filling -- would not willing to withstand overshoot. we think they could go over the 2% mark and two percent to 2.4% is a reasonable amount of technically overshoot. jonathan: without a your take as well? ms. hornby: i think they are willing to tolerate some overshoot. we heard williams talk about it and maybe we should move the inflation target higher, given that we undershot for so long, that is something they are willing to tolerate as long as it's not a dramatic overshoot. jonathan: you bring up the inflation story and jay powell and his followers for higher inflation. whether they were solo global central bank at the moment, and whether they are still sensitive to global financial conditions. in jay powell's mind, he's basically saying that this overstate investors the influence of the federal reserve on global financial conditions. that was the takeaway from his speech by a lot of people. do you think he is adult dating

the that -- understating the fed's role on financial conditions? mr. buchanan: you probably do have to look at financial conditions and understand that there is a time and a place for financial conditions and the real question is, if financial conditions got disrupted in a meaningful way, would that fed put reengage. our view is it may be off the table i think the fed understands we run a very delicate situation, not only in the u.s., but globally, and that the removal accommodations need to be done with care and it needs to be done with active feedback from the market. if the signals like curve were to come close to inverting, i think the fed will talk about that. jonathan: let's talk about how it evolves with the jay powell federal reserve beginning at the -- beginning of this year. has the fed put changed? the s&pmean just where

500 chain desk trades. oftenll the fed back 2015, 2016 off of what happened in china. moree federal reserve sensitive or less sensitive to that than they were a year ago? mr. rusnak: you are seeing them exit quantitative easing and arriving in an environment that we have never seen before and they are very sensitive to that, kind of setting the president for what other central banks are eventually going to follow. there is a good deal of sensitivity and keep in mind, they are also reducing the balance sheet at the same time. it's obviously something they are weighing. it is still very accommodative federal reserve. i had a conversation with an investor who said that typically real rate of the fed gets to about 1.5% and that would suggest the normal rate right now needs to get up to somewhere in the threes, 3.5%. are we going to get nominal rates at 3.5% of the federal reserve? ms. hornby: monday's cases

probably not. you probably do another two or three this year, another three next year but we are facing a significant slowdown in both fiscal stimulus and monetary commissions by the end of 2019, i know that they get there. -- i don't think they get there. jonathan: can they get rates back to where they once were? depends on how you where they once were. i think it's one of the methodically slow that i don't think you are going to see rates anywhere close to what we wanted witnessed historically for some time. i think we will see a fed that is cautious and moves slow and with care. mr. rusnak: they are further along than many other central banks and they are going to be more cautious. building is any reason for them to push it too fast. george rusnak, lisa

hornby, and mike buchanan. andng up, the auction block african nations set a record for selling bonds. that conversation is next. this is bloomberg. ♪

jonathan: i'm jonathan ferro, this is "bloomberg real yield." united states treasury sold more than $200 billion this week in bonds. i want to focus on the $17 billion 30 year u.s. treasury 3.13%, the-year-old highest since march 2017 with indirect bidders purchasing the most since january. italy holding a bond auction amid the country trying to form

a populist governments. the offering was met with solid demand and finally, in emerging markets, ghana to find the -- is -- the recent on-demand for $2.5 billion euro bond exceed supply for time, ghana got more than $800 billion in bids. talk little bit about emerging markets is george rusnak, lisa hornby, and mike buchanan from western asset management. we brought this up last week on the program and the in pain has discontinued. ago, argentina can come to market and access them quite easily and issue a century bond. 11 months later, they are questing imf aid, do we a robbery in story taking place here? things got a little too frothy in terms of access to markets. mr. rusnak: the story with

emerging markets is the rapid move higher in u.s. rate, the associated stronger dollar has caused a lot of technical volatility and it's not surprising that the highest play in emerging markets, argentina, is going to suffer more than other countries that are out there. we think the fundamental story that supports emerging markets is still there and these are generally economies that are early in their cyclical recovery and they are growing at a faster pace than developed markets. generally supported central-bank policy is an inflation, with some exceptions, that either stable or in many cases going lower. generally supported central-bank high real yields any supportive fundamental backdrop. we liked it before and things have gotten cheaper and relative value wise, we like it even more now. jonathan: thank you clearing this from investors, even after the shakeouthigh real, it's if e

it of the price last week, you would better like it now, is that your take? ms. hornby: it has opened up with the moves we've seen. whether or not argentina has stabilize of these levels, i don't know. the central bank is regaining credibility and they have taken the monetary rate up to 40% and they are working with the imf and try to get it in order. think they are making the right steps. there was a tremendous amount of influence and that had to be washed out for we can stabilize. jonathan: would you consider buying a century bond here? ms. hornby: no. buy aan: would you century bond from argentina now they repriced? mr. buchanan: is relative value. right now, now we are not buying them. we are buying local currency bonds. yield and you get paid for the risk. recognize that there is volatility there. i think there's a price for most assets and right there with a

century bond we haven't had any recently. i adequately , lastsated for the risk year we weren't, are we now? mr. rusnak: emerging-market debt is backed up to 360, 370 spreads. when you come back down and you're looking at yields roughly at the 6.5% range which you haven't seen since the 16. we think overall there are good areas of opportunity into michael's points, its pockets. yet to be very selective. jonathan: are you looking at credit sectors or regions? moore regions. we have switched a little bit more favorable to latin america and also to asia right now. i think you have to look at each country individually. every country is undergoing its own idiosyncratic story whether

it be elections or sanctions. i don't think you can look at the block of in and just allocated to an index. the market is in trade that way anymore and i do think there are pockets of opportunity. i think brazil and south africa they are undergoing reforms and they made to register rides and reliance on external funding is less. his individual. jonathan: how important is central-bank red ability? -- credibility? the turkish leader out today basically saying he wants lower rates even though inflation is crying -- find higher. do you look at pockets where things might be valued in the new look at the situation is whether that central bank has credibility and then you back away? mr. rusnak: central-bank red ability and policy plays --

aedibility and policy plays key part. brazil and i think lisa mentioned brazil, we also like it. they reform minded central-bank, the pastor rates has been lower and they've got an inflation to a point where it's probably the lowest they've witnessed for at least 20, 25 years. only thealuate not macro factors with respect to the economy, but central-bank policy is crucial. jonathan: dollar-denominated or local, mike? mr. buchanan: depends on where you are. i think the case for local currency from our standpoint now is the most compelling because we think the real yields when compared to real yields in developed markets really stands out and that's where most of our incremental money is going into emerging markets. the benches dollar-based with a local is where the opportunity is for greater returns. jonathan: george rusnak

alongside mike buchanan lisa hornby, they will be sticking with us as well. we want to get to a market check on where bonds have been. yields up on the front end by four basis points. i have to say, the 10 year over the last several weeks, despite the dramatic headlines around it has been really remarkably stable over the last several fridays in around 295. two basis points to close out the week to 2.97% over the 10 year treasury yield. ahead featuring a possible governing coalition in italy that some of called the worst-case scenario for investors and what does it mean? that's next. this is "bloomberg real yield." ♪

jonathan: i'm not ferro, this is "bloomberg real yield," coming up over the next week, if

possible governing agreements by monday between the five-star movement and italy, potentially ending a deadlock and china and the u.s. in trade talks, u.s. retail data points to watch from the eu giving a update on brexit talks and the central-bank decision in mexico weather has been a lot of pain in the peso very recently. still with me, torturous back from wells fargo, lisa hornby from schroeder and mike buchanan from western asset management. lisa, not when you give you a hard time because you to disclose last time you were on we talked about that short italy trade. it a shortlt is btp's with the politics of the moment don't seem to match up? what you haveat's to have the short on. we have had it on for a little while it has not worked in our favor until recently. you think about where the italian win spread was ahead of the french elections, we're talking 215 basis points. progress on the front of a populist movement in italy

becoming the governing party, five-star northerly and the market doesn't seem to care. we are 130 basis points on that spread. jonathan: why shouldn't that spread get tieghter? mr. rusnak: it should widen out in terms of the risk associated with italy debt. jonathan: what is the risk associated with italian debt? and hasn't the ecb insulated that risk anyways? mr. rusnak: if you start getting populist movements, you might actually get more issuance of debt and it's going to do going to putt's pressure on debt. jonathan: it hasn't made a massive difference on the long end. market,stated in the just walk me through the idea here. i guess fundamentally you have to ask not just one question about btp's, you have to ask another about bonds. what is more underpriced, bonds or egp -- atp?

you highlighted a opportunity just on a relative value basis, whether you are or italianbonds bonds or spanish bonds and compared u.s. treasury's, u.s. treasury's really stand out on a global basis and so you wonder about how i can rates really go just in terms of relative value of flow of funds? think there's an opportunity to own treasuries versus bonds and play that compression trade overtime. jonathan: you agree with that? full in the idea you have some pretty heavy fx hedging costs. mr. rusnak: those are coming down a little with the dollar strength i do think right now, you are going to see more flows into the u.s. awaiting the risk right now is still that you haven't seen the ecb play out and they are probably going to start getting out of quantitative easing towards the end of this year and raising rates maybe next year. we have seen that movie before and we know how that plays out

in a rather merely than late. jonathan: you think it's risk-free asset? mr. buchanan: yes. jonathan: we will wrap up this program and the themes in the final rate just week this week. would you short btp's or bonds into year-end? where does the performance come from or the underperformance? mr. rusnak: btp's. ms. hornby: btp's. mr. buchanan: bunda. s. jonathan: would you take u.s. high risk yield oriented credit? mr. rusnak: him credit. ms. hornby: e.m. credit. ms. mcmahon: i wish he would have said in local, i'm going to take high-yield. after the big debate through the last year about a 10 year treasury yield on the potential of it hitting 4% anytime you, i thought i would pose the following question --

10 year treasury yield, what do we see first? 4% or 2%? what do we see first on a 10 year treasury yield? 4% or 2%? mr. rusnak: 2%. ms. hornby: 2%. mr. buchanan: that's a widespread. i guess i will go with 2%. jonathan: we're right in the middle with three. it's great to have you with us on the program. george rusnak from wells fargo, lisa hornby from schroeder and buchanan from western asset management. that doesn't for me -- that does it for me. we'll see you next week. ♪

mark: i'm mark crumpton with first word news. saysean union policy chief the block is determined to make sure the iran nuclear agreement is respected, despite president trump's decision to pull the

u.s. out. speaking in florence today, he called for calm and dialogue on all sides. today,eems that screaming and shouting, insulting and bullying systematically destroying and dismantling everything that's already in place is the motive are times. mark: the out of the united states cannot undo the agreement by pulling out saying quote, this deal is not a bilateral treaty, is a un security council resolution and it belongs to the entire world. she has been reassured by iran's intentions by the declarations of president hassan rouhani and added the u.s. cannot undo the agreement by pulling out saying this deal is not a bilateral treaty, it is a un security council resolution belonging to the world. she announced she will share talks on tuesday with the british,