leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. >> from new york city. 'm jonathan pharaoh. -- farro. this is "bloomberg real yield." coming up, weaker than expected inflation. the yield curve flatted since 2007. a year ago argentina issue as century bond. year later they request time. populace party in italy can p.t.p. with a very little storm. is 4% the new 3%? >> is there a possibility the

quotes accelerates then inflation accelerates. it's higher than you expect, both in the short end in which my opinion would have it go up. people should be prepared for that. >> we're not in a normal situation but we are getting closer so that state. i think the u.s. economy could handle it. it's consistent with economic fundamentals. >> the real catalyst to getting us to a forehandle is probably not the fed. government issuance in this country as demanding that it will be for the market to absorb. it will be when the ecb and the market of japan will suggest -- ness of monetarily monetarily. >> we get huge foreign demand into the u.s. four is a little tough any time

soon. >> joining me around the table s the head of global we begin with this topic. every time i've brought it up i've taken abuse because no one thinks we get into 4%. so where is this 4% conversation come from, lisa? lisa: well, jamie diamond brought it up first. >> and everyone else seemed to follow. >> the head of j.p. morgan said we have to listen. we've never had q.e. we've never had the reverse of q.e. term premium is still negative. central banks will exit these programs. if that's true, we should be headed to more normal rates. >> could we get some more normal rates and is 4% normal in this kind of world?

>> well, i mean, any time that jamie diamond talks here, you're smart to listen. and in hearing that interview, it didn't really -- at least to me it didn't seem like he was predicting 4%. >> good point. >> what he was saying we need to get prepared for the possibility of 4%. we don't see 4% happening. we don't think growth and inflation is consistent with that. but we do have to make sure our clients' portfolio can with stand that type of shock. >> the fed has to go quicker. why do we forecast this parallel shift in rate as if the whole curve will shift. that's not how this works? >> rates have gone up 60 basis points. you'd see a flattening in the yolker. we do think that rates are going to be going up from here but not

significantly so. we think that real interest rate difference from overseas is going to hold that down. >> did the federal reserve have to go quicker? does that just lead to an inversion? >> that's why we're only calling for two more rises this year. we do think obviously you've crossed through 40. so you've got a flat yield curve. we do think if they move too quickly can cause an inversion. >> lisa? >> we have to focus on two things. e is inflation and the other things are what central banks. do if we see a surprise move out of the b.o.j., let's just say that could change the dynamic. downsize a really surprise on inflation but it's enough to get people excited. high output. low inflation. it's going to remain here to stay. mike, is this still goldilocks

good? or nothing's changing? >> i think depending on what market you're talking about. we do see more of the same. we see growth that is probably below consensus call it 2%, 2.5%. inflation is trending higher. but the fed right now is comfortable where it is. was talking about the symmetrical range. that tells us at least that they're willing to with stand inflation that goes above 2%. >> this is a really good point, george. and before we're going to try to understand. the reaction function of the federal reserve and trying to understand the sensitivity of he fed to hire inflation prints. does is the federal reserve endorsing a -- it in terms of communication. >> early op they talked about

and the idea they would not understand an overshoot. right now, we think they can go over 2%. 2% to 2.4% is the right amount to overtake. >> lisa, what about you? >> yes, i'm thinking they're willing to tolerate some overshoot. we've heard williams talk about it. maybe we should move the inflation target higher. i think's -- i think that's something to bring up. >> you bring up the inflation story and his tolerance to other inflation. >> i think it was whether they were still the global central bank at the moment. and whether they're still sensitive with global financial positions. he's basically saying that investors overstate of the federal reserve. >> that was the take away this week. do you think he's understating

the feds on global financial conditions? >> no, i think you probably have to look at financial conditions and understand that there's a time and a place for financial conditions. if financial conditions got disrupted in a meaningful way, would that fed put with that re-engage. i personally think and our view is that maybe it's off the table. the fed understands, we are in a delicate situation not only in the u.s. but globally and the removal of accommodation needs to be done with care, with active feedback from the market. and you know, you get signals like if the curve were to come close to inverting, i think the feds would take care of that. >> let's talk about how it's evolved in the beginning of this

year. e.m. china. we saw the fed backup an e.m. route. we saw the fed backup off the back of what happened in china. is the federal reserve more or less sensitive to that than they were a year ago. >> i think you're seeing them exit, quan tave rising sthrirmente we haven't seen before. they're setting the precedence. so i think there is a very -- very good deal of sensitivity. keep in mind they're reducing their balance sheet at the same time. that's obviously something they're weighing into. >> i had a conversation with week with an investor who said that typically real rates of the fed get to about 1.5. that would suggest the rate needs to get to 3, 3.5%. are we going to get normal rates at 3.5 of the consideration r

concern. they'll probably do two or three next year. but i think we're facing a significant slowdown in both fiscal stimulus and by the end of 2019 or 2020. >> i can the federal reserve on a real race basis gets rates to where they once were? >> it defends where they once were. the trend higher for rates is going to be methodically slow. i don't think -- you're going to see rates anywhere close to what we might have witnessed historically for some time. think think you're going to see a fed that is just cautious and moves slow and moves with care. >> george? >> yeah, there's no reason for them to move too fast. their of course, i will furrer along. they're going to be more cautious. >> guice you're sticking with me. -- holmby. bi-from

>> african nations set a record for selling bonds. that k is next. this is "bloomberg."

jonathan deln i'm jonathan fehro. to the option block. where the united states sold $3 billion. i want to focus on the record size auction for that maturity. it drew a yield of 3.3%. the highest since 2017. we go over to europe. italy holding a bond option rying to form a populace

government. an average yield of 1.34%. it was met with solid demand. ghana defined the recent turmoil as it extends a record setting ever ca. still with me to talk a little bit about emerging markets is george from investment institution. lisa holmby and michael cannon. we brought this up and the. m. pain has just continued. a year ago june 2017, argentina can come to market. access and issue a century bond. a year later they're requesting an imfa. m story ve a broader e where things got too frothy

access to markets? >> the story with emerging markets right now is the rapid move higher in u.s. rates. the associated stronger dollar has caused a lot of technical volatility. it's not surprising that the highest play argentina is going to suffer more than the other countrys that are out there. we think the fundamental stories that supports emerging markets are still there. these are generally economys that are early in their cyclical recovery. they're growing at a faster pace than develop markets. generally supportive central bank policies and inflation. with some exceptions that is either stable or many in cases going lower. high real yields and supportive fundamental backdrops. we liked it before. you're right, things have gotten cheaper and obviously just relative value-wise where we like it even more now. jonathan: investors with a consensus trade, that's what i

keep hearing. if you liked it at the price last week, you better buy it now because it's bet getting better. whether or not or general tina has stabilized at the right level, i don't know. i will say that their central banks have taken it to 40%. they're working with the imf. i think they're making the right steps. but as you said there was tremendous amount of influence. that had to be stabilized. >> would you consider buying the central bond? >> no. >> mike, the same thing to you? would you consider buying the central bond? >> right now, no, we're not buying the century bonds. we are buying some local currency bonts. you can buy 20% yields. you do get paid for the risk. granted, we do recognize there's

volatility there. > there's a price for more assets. >> just a really simple question as you anything. have i adequately compensated for the risk i'm about to ashume? >> we think you are right now. right now if you look at emerging market data backed up to 360 spreads. we think it can contract down to -- to 320. e, there are good areas of opportunities. to michael's points is pockets. >> you're looking at credit sectors, single names. or are your looking at regions. how do you develop the breakdown of where you put capital? >> we've switch ad lib more favorable to latin america and also to asia right now. >> i think you have to look at it each country individually to be honest. every country is going its own

id yo sin catic story. i don't think you can look at the block of e.m. and allocate it. because the markets don't trade like that anymore. i do think there are pockets and are undergoing reforms. reliance on external funding is less. so they're going in the right direction but again, it's individual. >> how important is central bank credibility at least that they have regained credibility. the turkish leader out today saying he wants lower rates. this makes things difficult. do you look at possibilities of e.m. where typically you think there might be value. and you look at whether it has credibility and then you back away? >> yeah, i mean, there's no doubt central bank credibility

and policy play as key part in emerging markets you look at brazil. lisa mentioned brazil. but we also like it. you have a reform mined central banks. the paths for rates have been lower. they've gotten to inflation that it's the lowest that they witnessed for at least 20, 25 years. entral bank policy is crucial. depends where you are. again, i think the case for local currency is from our standpoint right now, the most compelling because we think that the real yieldses when compared to real yieldses and developed markets really stands out. . that's where most of our incremental money is going right now. >> our bench is dollar days. but absolutely agree with that. is that the local is where the opportunities are for better

returns. >> a long side mieke buchan nan -- buchanan. they yield by four basis points with 253. i've got to say the tenure despite all the dramatic headlines. it's been really remarkably stable in and around 20295, 297. still ahead. on the program, the week ahead featuring a governing coalition in italy that someone has called his worst case scenarios. what does it mean for edp piece? this is "real yield."

jonathan: i'm jonathan fehro. this is bloomberg "real yield." a possible governing agreement

by monday between the five-star movement and league parties in italy potentially ending a lock. the e.u. giving an update on talks. there's been a lot of pain in the peso recently. lisa holmby from stratus and michael with me. it's great to have you with me. lisa, i'm not giving you a hard time because you did disclose last time iran, you did talk about the short iran. >> as you said we've had it on for a little while. it's not worked in our favor recently. when you think about the italian wing spread was. we're talk about 200, 15 basis points. now we see a populace movement beening the governing party.

five-star northern league and the market doesn't seem to care. we're 130 bases on that spread. >> the market doesn't seem to care about a lot right now. i don't think it should get tiringt. it should widen out as far as the risk is pretty significant. >> what is it associated with the italian debt? >> i mean, that's a valid point. we think that if you start getting some populace muement or issuance of debts, it's going to do nothing except pick up the yields. >> the united states trade has come out. it hasn't made a massive difference. just walk me through the idea here. i guess fundamentally, you look at that spread. you have to ask, not just one question about b.t.p.'s. you have to ask more about burns. what is more overpriced burns or b.t.p.?

>> jonathan, you highlighted, big opportunity just on a relative value basis. whether you're looking at boons or italian bonds, spanish bonds. compare it to u.s. treasuries. u.s. treasuries really stand out on a global basis. so you wonder how high rates can really go just in terms of relative value and flow of funds. we think there's an opportunity to own treasuries versus boones and play that compression overtime. >> do you agree with that, george? you have to fold in the idea that you have some pretty effective hedging costs there too. >> you do. those are coming down with the dollar strength here. do i think that right now you're going to see some more flows into the u.s. they're going to probably start getting out of quantitative use and start raising rates. we've seen that movie before and we know how that plays out. that would be earlier than late

- you think the risk is in the risk-free ack as? >> yes. >> we'll wrap up this program and the themes this queek and looking ahead to next week. would you short btp or burns into your end? what does the performance come from? what would you shore? >> b.t.p.'s. >> lisa? >> b.t.p.'s. >> i'm going to short boons. >> would wow take u.s. high hield or e.m. credit. george? >> e.m. credit. >> mike? >> i'm going to do be an outliar. >> i wish you vowled -- you would have said e.m. local. >> there we go. after the big di bait after am 10-year treasury yield and a hidden 4%. i thought i would pose the following question.

what do we see first? 2%. do we see first, 4% or see or 2%, what do we first. 4 or 2. george. >> two, i would guess. >> lisa. >> mike? >> that's a widespread. >> i guess i'll go with 2%. >> guys, it's great to have you with me on the program. george from the west fargo investment, lisa hornsby and michael brew kanan. that does it for us. we'll see you next week friday at 1:00 p.m. and 6:00 p.m. in london. mom you called?

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yousef: you're watching the "best of bloomberg daybreak middle east." here are the major stories this week. president trump polls the u.s. out of the iran nuclear agreement and global leaders disparaged the decision. hezbollah makes gains in lebanon's first parliamentary elections in nine years. emirates profits soar as the middle east bounces back. we will hear from one of the world's biggest long-haul airlines.

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