leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. 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." ♪ coming up, yields breaking up to the highest level since 2011. italian bond market adjusting to a populist government determined to spend more. e.m. central-bank credibility very much in question. just who is turkey process central bank governor? -- who is turkey's central bank governors macro the central bank

governor, or president erdogan. treasury yields breaking out to new highs. >> short-term, yields are going higher on a 10 year treasury. inflation is making a comeback in the u.s.. we will see positive surprises on inflation. it is seems inevitable with oil prices. 3.25% is the first stop. >> 10 year yields have a doubled -- effectively doubled in a year-and-a-half. the question is -- is that trade over and how much capacity is it to move higher if we look at 3.25% on a 30 year? that is going to be a big level. is there room for yields to move a little bit higher for , inflation expectations that creep into the markets more? absolutely. is it out of control? i don't think so. >> if the fed goes up three times for the rest of this year that is 75 basis points, , you have to ask yourself if the 10-year is going to go up that much over that time frame. if it doesn't come out will have -- if it doesn't, we will have an inverted yield curve this year or early in 2019. i do think it is crunch time for this. jonathan: joining me in new york is luke hickmore, senior

investment manager at aberdeen. joe higgins, managing investment -- director at tiaa-cref. diana amoa, portfolio manager at jp morgan. luke, welcome to new york. let's begin on treasuries. kick in through some key levels through the week so far. luke: this is a debate about how far can we sustain. we blew through all of the levels and it we hit 3.10. it's a bit eve relevant in a way what the level is. a bid for the end of the week, it may be a little more about italy. a safe haven, right? the spread versus germany is still really at high levels, and it will get higher. jonathan: we took out the 2018 high. we took out the 2014 high, and i

wonder, when you look at the spread over germany when the bond treasury goes beyond 300 basis points, how much wider can it get and can the united states and treasury market recover from -- decouple from the rest of the world? diana: it can certainly get wider. it is important to keep an eye on underlying growth spending. this quarter, we have disappointing growth out of europe compared to where we have been. the ecb had to downgrade language. there are transitory things that might be explained, and maybe whether related. we are not seeing inflation coming through in a meaningful way. when you add that to quality or what is happening on the periphery with italy, it is possible to see the spread widening further. jonathan: your thoughts?

luke: that is a good sentiment point, around italy, although that is fully priced in. differential u.s. growth is pronounced at the moment. jonathan: joe, we have had these discussions. a lot of people looking for flatness of the curve. it is a one-off week. what are your thoughts about the direction of that? it was narrow, and surely it gets flatter, and this week it changed. why? joe: in my view, it is u.s. underlying growth is strong and probably getting stronger as we see q2. that is what we are seeing with the long end, more confidence. jonathan: yield on the treasury curve. this week something changed. the curve got steeper. what are your thoughts? >> i think the front end to

stevens up again here. it is about the u.s. growth story. the long end, it will look past us and worry about 20 and growth slowing down. jonathan: what is about the 20 20's? everyone is starting to think about that more. so why are we not doing something about it now? it is about trump tax and when we could see the next problems coming up. there will be a recession, just slow growth. jonathan: i hear this all the time, especially with equity markets. and also with fixed income more. this obsession between what happens now will be fine and then wait for 2019 or 2020, then you will get a slowdown. do you subscribe to that argument, diana? diana: i think eventually you will have to price in the slowdown. right now we are focused on too many moving parts to the story. the impact of the fiscal

stimulus in the u.s. is starting to come through. it could push into 2019. what happens beyond that with monetary policy tighter, you mark? big question is the market getting ahead of the federal reserve in terms of interest rates? morearket is forecasting rate hikes that the federal project is projecting. what is the take from that? luke: i think markets are concerned about higher oil prices and the geopolitical risk. that could have significant cyclical and lead into secondary -- more sector inflation growth. jonathan: is it an old story? joe: the dollar is doing some of the military tightening for the fed. the matter what index you look at they are tying up in the u.s.

, if you get to next year, the markets are starting to take pricing out. it will remain 2.5 and 2.0. the fed is at real risk of going too far, too soon. jonathan: you really think so? looks any powell uberhawk. jonathan: what gives you that indication? luke: he wants to get up the hill. he wants to go marching up the hill with rates. he has room to get down the other side. i just think he is going to continue down that path, and the risk is just too much. that be the way we get 2020 as our problem -- would be the way beget 2020 as our problem area. jonathan: that is really interesting. diana, this is still in accommodative federal reserve, isn't it? diana: it is, but that is the point. that raises the likelihood that

you get more hikes. the federal reserve is concerned that we have had unprecedented stimulus when the labor market is tight. we do not want to be caught behind the curve, but we want to see other language. the next two meetings will be important. it is important to see what happens with the dots. we expect the medium. to signal one more hike this year. we agree that you get three hikes this year and possibly another three next year. jonathan: joe, you like the 90 basis point real yield? joe: yes, i think so. ,t shorter ends of the curve not so much the longer end. jonathan: you are all staying with me. coming up, the auction block. turkey holding twin bond auctions despite a 10-year government bond having the worst week since this is bloomberg. 2013. ? ?

jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block. investors are being blurred away from junk bonds. so fierce is the demand, value -- valeant is coming in white and with weaker lender protections than perform -- before. there was an $11 billion sale with a yield of 0.9 34%, the highest since january 2011. because share since 2017. less than planned from the lira tumbling. it tumbled to a record of the

central bank won't be given a free hand to surging inflation. we heard from the turkish president earlier this week about monetary policy. >> you will play a role in monetary policy going forward, is that the big change? >> this may make some uncomfortable, but we have to do it. it is those who will been -- rule the state that are accountable to the citizens. jonathan: still with me, joe higgins, and luke hickmore, and diana amoa. interviewer, but he barely had to push it. the president volunteered he wants to control the central bank. >> he was trying to tell us that it was a normal thing and that everybody does that. i was biting my lip all the way

through, rather than shouting at the telly. turkey, if you are thinking about countries and risk, we have seen argentina with 40% interest rates all of a sudden a. -- of a sudden. turkey is not far off with the external debt problem. they need to be keeping external investors happy. i don't think erdogan controlling the bank does that. jonathan: does erdogan control the bank? diana: this rhetoric from turkey - this is nothing new. we have had this rhetoric from the turkish president for a number of years. the issue is, central bank independence have always been questioned in turkey. that is the narrative. you have lack of credible monetary policy, you have deteriorating economic balances. inflation that they cannot get a grip on. the macro picture remains weak. whether the central bank will

come around and hike, we will wait and see what the next meeting brings. jonathan: more broadly, the chief economic advisor has a trifecta of poisoning for emerging markets. rates are climbing into the dollar is stronger. how much of a challenge is that? joe: you have to differentiate between crude importers and crude exporters. it is country specific. there are a lot of winners and losers. it is a trifecta. we are not convinced the dollar rally continues. it could be the top with technical directions and dollar short reversed. one thing to look for when you were talking about problems in emerging markets, the individual story in argentina. argentina had a great policy response, different from turkey. it is country specific. jonathan: you said a great

policy adjusting to a bad policy decision. diana, do you still have the confidence around those two issues? more crucially for investors, you have exposure to the local currency bonds -- is whether the fx volatility can stabilize. do have the confidence it can stabilize? diana: i think now technicals are cleaner. there was a huge amount of positioning in local. we have seen outflows in the last few weeks. there is less of a credit position. that had become concerning for us. additionally, we have seen repricing in weaker stories. valuations look more attractive. i agree that you need to pick your winners if you want to reengage. there are some markets that will continue to perform well. look for places that export commodities. commodity prices should remain supportive, have credible institutions and policymakers at this point in the cycle. adjustments have happened, so

external balances are not as vulnerable. one last point, within emerging market get space, emerging market corporate should do well in these environments. if you look at where we are in terms of leverage, leverage has been falling in corporate's. weaker currency should help earnings with exporters. nuanced than wholesale emerging market selling. jonathan: as you know, whenever there is a fire, there is someone to pour gasoline over it. this week, that economist -- that someone was a harvard economist, saying that some countries are doing worse than where they were in the financial crisis of 2008. double transfers have a double whammy. even more has been borrowed from china. this is not from gloom and doom, but there are external and internal vulnerabilities. compare this now to 2008, with

the mac drove -- macro backdrop as pharmasset is in the global markets. is in the as it global markets. diana: my thoughts are threefold. one, em economies are overheating. this time around, emerging markets still have a negative gap, around 2.5%. second point, although rates are slightly lower, when you look at inflation for em back then, they had an average inflation close to 8%. right now the average inflation for em is around 3%. stronger starting point. it is a natural progression as they mature. you have corporate that didn't have access to external markets that can access those. i think looking at the number, it is slightly alarmist. i think emerging markets can weather this. the responses are credible. you have brazil not cutting when the markets expected it. indonesia is quick to respond. this time is different for em.

jonathan: diana amoa, great to have you with us, alongside luke hickmore and joe higgins, still ahead, more from jay powell. this is "bloomberg real yield." ?

? jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. over the next week, the

venezuelan election this weekend. brexit negotiations continue. the bank of england and the fed 's jay powell and other central bankers will be at a conference. also we will be watching closely , to see if an italian prime minister is named now that the government program has been agreed-upon. still with me is luke hickmore, joe higgins, and diana amoa. btp, totally battered through the week. we wondered when the risk would bite. here it is. are they a buy yet? luke: no. you can easily say it is going to be tough to get things through. we have to get this government off the ground. there is going to be so much rhetoric from them at the beginning when they get things done and how they will be successful and they will get brussels to support them. it is at 164 over in italy. i want to see 170 or 180.

the crisis is not that long ago and we could get something a bit like that. it feels to me it should be 200 to compensate, not 160. jonathan: do think it might be conditioned by a trading regime to some extent? is risk domination a factor or is it about increase d supplies? luke: it depends on how far brussels comes toward italy. if they don't come to help the bank, to help with their massive fiscal spending, it will be brutal. if they come too far and get to italy, spain will look ok and ask why are we going to everything we are going through when italy is getting it from , brussels? then you will have more risk in , europe. jonathan: that is your answer, why would the europeans do it? why would they let that happen? why would they let spain follow this and get out of control?

joe: the europe response will be measured. we are not convinced much will happen as opposed to what is being talked about. jonathan: would you buy bcp's where they are now? joe: we think they are fairly priced. there could be better points of entry, though. jonathan: interesting. diana, your thoughts? diana: with political stories, when the outcome is uncertain, i don't buy when things are fairly priced, only when there is certainty. i think it is still too early. we do not know exactly what it is it will get in the end and who the prime minister and of the finance minister will be here we will wait and see how it plays out. jonathan: luke, we have an interesting situation in europe now. we used to talk about core and periphery. we now have super core, and you have countries on their own. spain, italy, germany, italy and

greece somewhere out there. luke: the leadership has changed. will be theron voice of europe because angela merkel has lost to much power. will beesponds to italy watched in the next several weeks. if they want to push on fiscal and that fits him, we may see brussels. the splitting of the market is a classic approach to look at your portfolio. it is all europe and the same risk. italy at the moment, i agree with diana, buy when it is cheap. jonathan: you don't like btp's now, do you like bunds even less? luke: yes. jonathan: that bad for bunds? luke: yes. it is two years passed for germany. in germany, you are seeing wage rises coming through and you are seeing the need to get fiscal expansion out there to the rest of europe so then it will be disastrous. jonathan: the front end is just there, like a cold spring, push

-40 basis points. we start adjusting for a change there? luke: will make it to the 10-year at plus 40. that is what i feel would be fair value. that would be pricing in where germany should be going. in october, when draghi is known -- is no longer buying germany maybe that is , when you start seeing 90 or 100. jonathan: i'm going to ask you questions as a rapidfire around. i will run through questions for you. will the market come down so -- to defend, or will be fed to move up to the market? what will happen? luke: i think the market will come down to the fed because it will only do two. joe: i think the fed comes to the market. we are calling for three this year. diana: i think the fed comes to the market. jonathan: btp bund spread, why narrower by year-end? luke: wider. joe: flat.

diana: flat. jonathan: who runs the central bank of turkey? the governor or the president? luke: erdogan. joe: erdogan. a joint effort. jonathan: great to catch up with you diana amoa, joe higgins, and luke hickmore. from new york, we will see you next friday. 1 p.m. new york time and 6 p.m. in london. this was "bloomberg real yield." you are watching bloomberg tv. ?

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