david: -- >> this is bloomberg real yield. >> coming up, a shakeup in the european bond market. political risks spreading from italy to spain. trading were 10 year yields were a week ago. desperately trying to regain some credibility. we begin with a big issue, political risk in europe making a comeback. >> italy is the toughest call tactically here. six to 20 months

around dust down the road. theix to 20 months around road. >> backstopping the bond market and keeping peripheral spreads from widening. >> the spreads widening from italy, that is having a contagion effect with some of the other peripheral markets. >> we prefer u.s. treasuries are european sovereign bonds. debtaly has quite a lot of but you have to look at the coupons that they are going to replace. >> the europe story has run its course. there is a lot of money that left. >> joining me around the table is henry peabody. cyberonicsrg's lee -- and bloomberg's lisa abramowicz. henry, i want to begin with you.

why is so much of this happening in europe at the front end? we have seen volume explode, intraday moves for 20 basis points on two years, why all of that? henry: there is a bit of a curve flattening going on. you see the risk coming out at the end of the market with liquidity. what has happened in europe? fairly solid improvement over the last handful of years and sustainability, lower interest cost, but they have not grown to the degree the rest of the condit has. there is a reason for unrest there. the question is how do you decouple italy from europe and you do not. that is the issue. willie get worse before it gets better? probably -- will it get worse before it gets better, probably. >> yet the think about what you are pricing in.

-- you have to think about what you are pricing in. that just means we are pricing in more supply. which one is it, lisa? that we are on 2.5%. ecb ist feels like the running out of room to suppress the yields on the ecb. does seem like since we are getting to the end of that stimulus, the deficit starts the matter again. exactly. these things do not matter until they do. when you have bedrock assumptions that institutions are going to keep these ratios in check, when you have those assumptions pulled out, all the sudden you are priced on fundamentals again. >> a classic eurozone mood swing. things start to fall out of bed, but the lesson of last year or so is that you profit from

political risk in europe. what's to say we will not see that in italy, too? itwe have all gotten used to and some traders are getting too comfortable with that. this could be worse. there really is not a lot of interesting things to look forward to in italy. they don't even get to go to the world cup this year. [laughter] henry peabody, let's not talk about the world cup. my father's italian, you are going to get us into trouble. we need to understand the reaction function of the ecb to really make a call on ecb presence on this. ofthere a line in the sand the qe era been around the 24o mark, is it significant? why is that a key level for so

many people? >> i'm not sure that it is. one of the things the ecb has the opportunity to do is instill a little discipline. inh the political shift italy, they have the opportunity to fight back as they are pulling back. let's watch as this plays out. we do probably see this gets weaker before it gets better. in other words, you see the ecb would perhaps not step in on purpose with perhaps allowing yields the blowout in order to send them a message. it would not be the first time that the ecb would be accused of having political motives. asked is really important because from a technical standpoint to understand the ecb's reaction function, to justify stepping in aggressively, they would have to moves are harming the transition mechanism.

do you see the moves or anything that can credit the ecb the justification to step in aggressively and say, transmission mechanism is being harmed by what is happening? >> no. not at this point. you are seeing a shift from 10 way to fighting inflation. the ecb is being pulled in another direction and that they cannot keep rates so low for so long that they further invert or threaten to invert the u.s. curves. they do not want to be and a cop .ist -- an accomplice jon: they are looking to line down the whole qe program, so you just spotted the headline -- lisa: it goes to henry's point. they are not coming out as doves. this indicates, it is game on. we want to exit quantitative

easing and if you have a political problem, that is your issue. jon: if you want to price this, let's talk about the spread were italy trades right now. italy trades closer to greece basis thann year it is to germany. does that make sense? >> it does. ecb, they are going to have to be accommodative but not step in from a political standpoint. it gets worse before it gets better. jon: is it make sense to you, henry? henry: it does. what we have is a technical unwind, the technicals are going to be very important. you need to respect them. jon: let's talk another level. -- a does thatn make sense? does it make sense to have a multitiered bond market in the eurozone were people start applying the term semicall to

spain? >> if we are getting to the point where we are going to have , and hiseed europe forces germany to the table and expect more of a franco centric plan, you need to see some form of differentiation. when you compress to spreads, bad things happen. looking at the spanish gdp and the acceleration we are expecting. it is a better economy than the italian economy. period. the end. that is what a bond market is to be. jon: that is what should be. lisa: yeah. jon: is the ecb going to allow this to happen? and i am notwent, saying that anybody's having discussions about that happening , but if they went, the whole thing comes apart? lisa: they are going to step in

eventually. issue is that this is not enough to scare them off. when peopled point start talking about the 2011 european crisis more seriously, maybe then. of 250, 245?a bite >> not quite yet. you always need to buy what others are selling to accumulate a position. look at the banks as a barometer. five to 10 points depending on currency down. it does not seem like you are seeing enough selling pressure, yet. sticking with is me, henry peabody, matt brill, and lisa abramowicz. some breaking news, united states said to have a deal to -- a lousy -- stay andzre to

business. the united states is saying is an enforcement issue and has nothing to do with trade. to stay inllowzte business. , the second largest corporate bond sale. this is bloomberg real yield's. ♪

♪ jon: this is bloomberg real yield. united states treasury auctioned millions of dollars of bonds this week. the highest level since july 2008.

n the corporate side, bonds to help fund the acquisition and the second-largest u.s. corporate bond sale. it yielded 2.15 percentage points. hungry supply stocks. five yield bonds yielding and they are trading above the issue price. crisis of europe, the em in turkey. take a listen. >> this is serious. that by itself, the central bank of turkey is going to be able to stem this. >> when you have the administration saying they are takeover the central banker, this is a country that is facing a lot of uncertainty.

>> even in the healthy countries, politics have a way of destroying economic policies. >> there needs to be more and i think that is what the market is telling the turkish central bank year. the question is will -- bank here. the question is will they remain independent. >> things are very different now. an importerhat is of energy, they should be running scared, to be honest. me, and lisath me,mowicz -- still with matt brill, henry peabody, and lisa abramowicz. ? is that enough? >> not yet. the question was whether the president or the central bank is in charge?

the market is in charge and it forced them to hike 308 basis points -- 300 basis points. he saw a little reprieve in the lira. they are going to be fine, but they are going to get pushed to the brink one more time before they realize the market is going to demand this. you cannot have a president talking about central-bank policy he does not believe works. jon: it has been the story of the week. you take turkey and you make an em crisis and compare it to the 1990's. you might say we might get a crisis, but to compare it to the 1990's -- >> a lot of development since the 1990's. exchange rates are not fixed. the turkey question is really an interesting one. -- aare in a bore

vortex between being late to the hike, presidential interference. the president calling for an ease. i decided know being really cheap, but you do not know why you are essentially jumping into this. compare that to brazil, argentina that is undergoing structural reform, and there are weakeneds that have substantially the have offered a more sound reason for the long-term. not somewhere that is remotely expensive and enough to get involved with. lisa: to your point of what int,ative you want to pa emerging markets as a whole look better than they did in the 1990's. there are idiosyncratic stories, turkey among them, african nations that have common so of easy in this period

money that any little hiccup is going to cause serious issue. there was a big overweight and a big consensus position. what is your view? do you maintain a despite the events of the last couple of weeks? that oil is told me roughly $70 a barrel, i would've told you that you are crazy. but that is what has happened. has anow, anybody that large external deficit and is relying on their exchange rate to be solid is under a lot of pressure. argentina, turkey, you want to stay away from them for now. if you can stick with things like mexico, pam x looks very attractive right now. we are going to go that route rather than try to pick some of these other credits. jon: on oil, that has been a

really difficult part of all of this. if you're importing a ton of higherhe way turkey is, oil is bad news for turkey, good news for russia. it is not a blanket, em, ok story. >> no. it is a higher dollars of the cost of capital is increasing on two fronts. very rough. the oil situation is an interesting question and you have the u.s. and saudi going after iran and russia. today's opec announcement as an acknowledgment of that. jon: crude closing out the week as the saudi announced they can close out. you have higher short-term rates and the states, crude has been rallying, and the dollar has been strengthening. on the latter, crude start softening -- dollar start

softening and a lack of crude. i do not know how you can reconcile. if you are going to have conviction on em, can you have a flaky call on the dollar? lisa: this is a great question. moved in sync and this is to be expected since a lot of their debt is dollar denominated. therene is saying good are idiosyncratic stories with in emerging markets but so much of the money has gone into index funds. do people -- at what point do people out and the stories do not matter anymore? jon: lisa abramowicz sticking with me. in the markets this week, we shape up as follows. bonds, twos, tens, and 30's -- 2-year yield's down 7,

10 year yields down 13 basis points and the 30 year, trading where the 10 year was a week ago. i really reverse of this market. the story returns. still ahead, the final spread and the week ahead featuring the u.s. jobs report. this is bloomberg real yield. ♪

♪ jon: i am jonathan ferro. this is bloomberg real yield. it is time for the final spread. coming up, a reminder that u.s. and u.k. markets will be closed on monday. we will have a series of u.s. economic reports including the payrolls report and a reading on gdp. plus, the fed's base book and meeting for central bankers. for final thoughts, still with me is matt brill and henry peabody. matt, as we look ahead to payrolls, i want to highlight a

story in the treasury market and the remarkable stability that has come about in the front end of the curve. week for thet the fourth a straight week. what is the signal that comes from that? matt: we had such a big run-up in the beginning of the year where everyone was concerned about inflation. sales are really pushing up a front end as well and we are in a much more stable place. we felt the fed minutes this past week were telling you that of fed is for three for all 2018 and that is why the two-year has held where it is. jon: how important is that? the fed is pretty important. matt's point is a good one. ust dealt oh between the that delta between zero rate hikes and two to three or three to four is gargantuan.

that front end, the delta are that ties in with dollar strength is not necessarily going to be so big? i personally thought the fed minutes were interesting and that the fed seem to build in a lot of flexibility. inflationwe will take higher, a steeper curve, there are conversations around the dot plot going away, so the fed is introducing ambiguity to the market. lisa: people are finding cash attractive. a growing number of investors are saying they are increasing the allocation to cash. how are they getting the allocation? into your treasuries. treasuries.ar jon: has it become enough to buy into the? curve -- into the curve? >> yeah. but us, that is not something we are enamored by the front end. jon: what your thoughts?

we're looking at corporate credit. only about 40% of the whole ig , and now weields are at 80%. you do not have to whether the volatility. jon: matt brill, thank you. some short, quick questions. we begin with the italian 10 the other? which one would you buy or hold? lisa: spain. matt: spain. or 10 yearr bonds treasuries through to your end, henry? treasuries but not emphatic. i would think the markets position is towards bonds. matt: i'll take treasuries.

jon: how we see in high on the 10 year yield on 2018? i like to recycle that question. have we seen the high on the 10-year yield? lisa: know it henry: no. matt: no. jon: henry peabody, matt brill, romwicz. ab enjoy the three-day weekend, this is bloomberg real yield. ♪ our phones are more than just phones.

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u.s. officials have resumed talks with north korea after he calls, "it's nice statement." north korea still is open to a meeting. authorities in suburban itianapolis has taken on man -- a student into custody after a shot another student and a teacher this morning. the shooting happening at the nobleville west middle school. on the, the death tolls passenger plane crash of -- have risen to 112. there is a 19-year-old cuban woman as the sole survivor. the cause remains under investigation. brand new $12.9 billion aircraft carrier is heading back to virginia shipyard after problems were discover