>> i am jonathan ferro with 30 minutes dedicated to fixed income. coming up, though week belongs to the treasury. the italian bond market adjusting to a populist government determined to spend more. central bank credibility still questioned. the governor himself or president are drawn? treasury yields breaking out to new highs. , inflation is

making a comeback. oileems inevitable to me prices are doing what they are doing recently. 3.25% is the first step. >> 10 year yields have doubled in a year and a half. the question is, is that trade over? big level.l be a is there room for yields moving higher for inflation expectations? absolutely. is it an out-of-control situation? i do not think so. >> the fed 's three times or the rest of the year, that is 75 basis points and is the 10 year going up that much over that kind of timeframe? if it does not we will have an inverted yield curve later this year or in 2019. i do think it is crunch time for this. jonathan: joining me is the

investment management -- manager aberdeen standard. london, ag us from fixed him -- income portfolio manager. welcome to new york. some key levels through the week so far. >> this is a debate about how far over 3% we can sustain. we blew through the levels for sales and hit 310, almost through 11. it is a bit irrelevant what the number is. about italy and the u.s. being a safe haven. versus germany which i have on my terminal, it is still high levels and it will get higher yet. we took out the 2018 high and i wonder, when you look

at the spread over germany, when the blends treasury spread beyond 300 basis points, how much wider cannot get and can the u.s. and the treasury market decouple from the rest of the world? certainly get wider. what is important to keep an eye on is what is going on with underlying european growth and inflation outlook. this quarter, we have disappointing growth that of europe relative to where we have been in the last few quarters. the ecb has two downgrade some of its language around growth and there are transitory things that are explaining this, some of that is weather-related. we are not seeing inflation come through in a meaningful way. when you add that to perhaps a bit of a flight to quality on what is happening on the periphery with italy, it is possible to see that spread widening farther. thoughts?your >> that is a good point that was

just raised. sentiment around the problems out of italy although we think they are diced into the market. we will bring in the european yields considerably and the differential to relative differential to u.s. growth is pronounced at the moment. >> we had these discussions multiple times but the difference is the shape of the curve. a lot of people looking for flatness. is coming steepness through. what are your thoughts about the direction of that? it was the spread between 210 and narrow and it gets flatter and this week it changed. why? -- fairpoint. growth's getting stronger as we see q2 and that is what we are seeing with the long end. more confidence in there. jonathan: this week, something changed. the curve got steeper. what are your thoughts? and stevensront from here, we are 50 on at the moment. 80 or so context.

long end of the curve will be this, starting to worry about the 20 20's and growth slowing down. jonathan: what is it about the 20 20's? >> where we not doing something about it now? tax, the stimulus bringing forward growth and when we could see the next problems coming up. it is a bit too common, neither 2020, it will be slow growth. >> i hear this all the time especially with equity markets. and fixed income so much now. this obsession between what will be fine but wait for 2019 or 2020, you have to rice in the slow down. do you subscribe to the argument? diana: we will have to price in the slow down. the reason why the market is focused, there are too many moving parts. the impact on the fiscal stimulus is starting to come

through. that could push this into 2019. what happens beyond that when we are at a point in the cycle where monetary policies will be tighter is a big question mark. jonathan: is the market getting ahead of the federal reserve in terms of protections for interest rates? it has not happened for some years. the market is forecasting more rate hikes and the federal -- than the federal reserve is projecting. what is the signal you take from that? >> the markets are concerned prices, the oil geopolitical risk as we are aware in that could have negative -- negative cyclical impact. the dollar is doing some of the tightening for the fed anyway. fiscal conditions are tightening. no matter if you look at the bloomberg or the goldman sachs index. , notet to this year

three-on-two and the market is taking the pricing out. think to into is the most and the fed is that risk of going too far too soon. jonathan: you think so? >> he looks like a hawk. just the rhetoric we have had since he got appointed. he wants to get up the hill. he wants to go marching up the hill with rates so he has room to get down on the other side and i think he will continue down that path and the risk is too much and that could be where we get 2020 as well. jonathan: real rates are still negative at the federal reserve. this is still an economy -- and accommodative federalism -- federal reserve. >> that raises the likelihood

that you do get more hikes. the federal reserve is very cognizant that we have had this unprecedented stimulus at a time when the labor market is tight. we do not want to be caught behind the curve. the next two meetings is imprinted to see what happens with the dots. expect the median. to signal one more hike. we agree, we get three hikes this year and possibly another three next year. jonathan: do you like real yields than, 90 basis points? >> i think so. the shorter end of the curve, not so much at the longer and. end.nger turkey holding 20 bond auctions for 10 year government bonds having their worst week since 2013. this is bloomberg real yield.

jonathan: i want to head to the auction block where investors are lured away from that. valiant is getting the loan and with weaker lender protections than before. there was an $11 billion sale of 10 year tips that joy yield of 3.9%. taking the biggest share since july 2017 and in emerging markets, the lira tumbled to a record on speculation the central bank will not be given a free hand to rein in inflation.

with the interview of the week when we heard from the turkish president earlier this week. he spoke with guy johnson about monetary policy. a role in play monetary policy going forward, is that the big change? erdogan: yes. we have to do it. it is those who rule the state who are accountable to the citizens. jonathan: joe higgins from tiaa investments and our other guests. heantastic interviewer but barely had to push him. the president wants to volunteer this, he wants to control the central bank. >> he was trying to tell us this is a normal thing, that everyone does this. i was biting my lip all the way through. turkey if you are thinking about

en countries at risk. into the not far off same problems. they need to be keeping external investors happy. i am not sure that erdogan controlling direction for the central does that. jonathan: is that what we are seeing in turkey? >> what we had is nothing new. we had this rhetoric from the president for number of years. there was nothing new there. the issue is central bank independence has always been questioned in turkey and that is the narrative. you have local credible monetary policy, you have deteriorating fiscal external balances, you have inflation that they cannot get a grip on. the macro picture remains quite week. whether the central bank will willaround and tighten, we

see what the next meeting brings. jonathan: mohamed el-erian alling out this trifecta poison for emerging markets, crude up, dollar stronger, rates climbing, how much it -- of a challenge is that? >> you have to differentiate between crude importers and crude exporters. a lot of winners and a lot of losers. it is a trifecta. we are not convinced the dollar rally continues. we think it could be near the top. there are some technical corrections and dollars shorts that have been reversed. one thing to look at when you're talking about problems in the end, argentina, a great policy response, completely different than turkey. great policy response to adjust to a very bad policy division -- decision.

i wondering if you have the confidence around those issues. maybe more crucially they have exposure -- exposure to the bonds, do you have the confidence that the fx can stabilize? >> the technicals are cleaner. there was a huge amount of positioning. we saw outflow in the last few weeks so there is less of a crowded position. that is something that had become concerning. we have seen every pricing in some of the weaker stories create valuations look more attractive than the -- where they were. you need to figure winners if you want to reengage so some markets, that will continue to perform well, look for places that export commodities, prices should remain supportive. where the adjustment has happened, the external balances are not as valuable. also within the emerging market

debt space, e.m. corporate should do well in this environment. if you look at where we are in terms of leverage, leverage has been following -- falling in corporate's. the story is here, it is a bit more nuanced than wholesale e.m. selling. wasthan: that someone harvard economist reinhardt warning that markets were in group -- worse shape. she said if the u.s. policy becomes tighter and there is no comparable follow-through by advanced economies the dollar strengthens, you have a double whammy, more than two thirds of e.m. debt is dollar denominated. just get to the essence of that. comparing now to 2008 with the macro backdrop. what are your thoughts?

in 2008, e.m. economies were overheating. this time around emerging negative output gap around 2.5%. the second point is although real rates are slightly lower, when you look at inflation for e.m. back then they had overheating economies, average inflation close to 8%. is arounde inflation 3%. stronger starting point. and external debt growing is a natural progression as economies mature. you have corporate's who did not have access to external markets that can access those. looking at that number is slightly alarmist. emerging markets can weather this. the responses are credible. you had is ill not cutting -- brazil not cutting. take a slightly different

take. this is different for emerging markets. jonathan: great to have you with us. still ahead, the final spread, featuring fomc minutes including jay powell. this is bloomberg real yield. ♪

on a thin: it is time for the spread. we have brexit negotiations continue. south korean president mine

meeting with president trump. fomc minutes and the bank of england's mark carney, jay powell you and other central bankers will be at a conference for the bank and we will see if minister isprime named now that the government program has been agreed upon. with me, our guests. let's begin with you. btp's totally battered through the week. we wondered when the political risk would bite, are they a buy yet? >> you could say it is difficult to get a whole bunch of stuff through and that is right. it will be so much rhetoric from them right from the beginning of when they get things done and how they will be successful and get brussels to support them. , i want to see this at 170 or 180. the european sovereign

crisis is not that long ago. to compensate 200 you. not when 60. jonathan: if we do -- is this about an increase of btp supply, two different things. guest: if they do not help with fiscal spending plans, then, no. no problem. if they come too far, if they -- or spain will look over and save why is italy getting it easier from brussels and then you have younomination risk and would be batting 1000. jonathan: why with the europeans do it, why would they let that happen? >> europe's response will be

measured. ultimately we are not convinced much will happen or lot will happen as opposed to what is being talked about. btp'san: would you buy where they are now? >> they are fairly priced but there could be better points of entry. storyh the political especially when the outcome is uncertain, i do not buy when they are fairly priced. i buy when there is some cheapness. it is too early. we do not know what it is that you are going to get in the end, who is a minister is, who the finance minister is going to be. we will wait and see how this plays out. to talk aboutsed core and periphery, we have cyclical, core, semi-core, periphery, it is becoming very different the way it has changed. now you have germany on its own and france and spain on its own and italy and greece are somewhere out there.

leadership has changed. the voice ofe europe. how he responds to italy is the key story to watch in the next couple of weeks. if they want to push forward on the fiscal and that suits him, you might see brussels, bit. this splitting the market, that is a classic approach to find ways to diversify your portfolio and explain to your clients, it is all europe, it is all the same risk. italy at the moment, i agree with diana entirely. by when it is cheap, not when it is fair. jonathan: you like bunds even less. years past. capacity and you're seeing wage rises coming through. you're seeing the need to get the fiscal expansion out there. for the rest of europe but then it will be disastrous. >> the front and is there, push 40 negative basis

points. >> we have been close to 40 and 90 in the 10 year. fair value, that would be pricing and where germany should be going. in october when mario draghi is no longer buying germany maybe that is when you see 90 or 100. jonathan: if you quick questions. -- a few quick questions. we began, well the market come down to the fed or will the fed move up to the market? what is going to happen? >> i think the market will come down to the fed. the fed will only do two. >> the fed comes to the market. we're calling for three this year. >> the fed comes to the market. jonathan: b theund -- the b und spread? >> flatter.

governor,who is the erdogan? >> are to want. >> erdogan. >> a joint effort. jonathan: thank you. me, from us,for from new york. this was bloomberg real yield. you are watching bloomberg tv. ♪

>> you are watching the best of bloomberg daybreak. the major stories driving headlines from the region this week. diplomatic pressure on israel after the bloodiest violence since 2014. the eu expresses deep concern and urges maximum restraint. opec says the cartel has enough capacity to cushion oil market as the u.s. three imposes sanctions on iran. >> and property crisis in dubai. despite earnings missing even the lowest of analyst estimates. >>