jonathan: from new york city, jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, an optimistic chairman powell during the fed up for a third or fourth hike this year. draghi delivering more dollar strength. emerging markets suffering another tough week. we begin with a big issue. the u.s. economy looking anything but weak. >> the economy is very strong. strong and resilient. >> job markets remain strong. we see a very strong economy across a bunch of fronts. the u.s. economy is in great shape.

growth is strong, labor markets are strong, inflation is close to target. the economy is very strong. the labor market is strong. growth is strong. overall, we have a really solid economy on our hands here. so, what we are doing is we are trying to conduct monetary policy in a way that will sustain that expansion. the main takeaway is that the economy is doing very well. most people who want to find jobs are finding them, and unemployment and inflation are low. jonathan: joining us at the table is colin robertson, andrea di censo, and alan higgins. let's begin with you, colin. i haven't heard, post crisis, a federal reserve leader sound that bullish on the economy. have you? colin: i have not. it certainly with the clip, he stated "strong" multiple times. i agree it looks strong now, but

the real concern is what it will look like six months, nine months, and a year from now. the expectation with the fed moving forward twice this year is based on the premise that how things look now is how they will continue to look for the next 12 months, and that is going to be much more challenged. jonathan: what is the distinction between bullish and hawkish, andrea? i don't hear an incredibly hawkish chairman powell. did you? andrea: no, i agree. what you heard is chairman powell highlight that things are running on all cylinders in the u.s., and that is likely to continue to be the case. the item we need to consider is, is the inflation story going to actually play out, and can that allow the fed to continue with the hiking path as they seek? jonathan: allen, the other thing to look at is the treasury curve. we always have the debate on this program, what does the

shape of the treasury curve actually tell you? what does alan higginsay back to that? alan: everyone talks about it now. i think it was the atl f president who said his job was to avoid an inversion year. we are getting flatter and flatter. part of it is the huge bill issuance you are seeing. maybe the u.s. can take a lesson of what we do in the u.k., our debt in the u.k. is long, probably too long, with an average duration of 12 years. i can't understand why they are hitting the front end so much. that doesn't help with the flattening curve. jonathan: we could talk about what they should and shouldn't do. it is what they will and won't do where i guess we will make money. do you just assume the forces will continue pushing the front

end up? colin: i think so. i would play the flattener. it is not that i'm comfortable having to do so, but i would point out that we have had two rate hikes this year, in march and a couple weeks ago. in march, the ten-year treasury was at 292. today, we are at 292. if the fed decides to move twice more this year, i think it is inevitable that the curve inverts. jonathan: weather is the spread opening in a big way, the fed might be going gradually and slowly, but they might well have hiked another 100 basis points before the ecb thinks about raising interest rates. the spread of bunds to treasuries is approaching 320. is there any oxygen left? how much wider can it get? alan: it can get wider because of the front end. it is about the shape of the curve. sitting here looking at the u.s., we look at how strong that clip is. but the ecb is so dovish. you have the front end stuck at -40, so you have got quite a steep curve in europe. once you hedge the currency

risk, actually, incredibly, europe looks better on a hedge basis. i think they've been frustrated by draghi. i think draghi was ultra dovish. it really hurts the banks as well, the holdout for negative rates next year and beyond seems really dovish. jonathan: can the fed carry on going alone? andrea: i think the fed should continue, and that is what powell said. he said to extend this expansionary period, he needs to continue to hike, and the fed has to continue on that path. the fed hiking and the ecb staying unreasonably dovish is indicative of the desynchronization of growth we've seen between the u.s. and the euro area in the last six months. until the euro area growth can

continue back to trend and move higher, we can continue for that to be the story. jonathan: give us the perspective from london at the moment. what are the appropriate trades you've got at the moment that you think capture the kind of story we've been debating for the past six minutes? alan: in terms of income streams, it is pretty hard in government bonds. in terms of the u.s., a mild preference of flattening. our work indicates that the curve, when it moves, it tends to trend. but i think it is late in the game and hard to make money. here in europe, we think italy drag is effectively, one of the great things he has done, i suppose, is he's calmed down the italian situation. a micro situation we like in europe is portugal. we've got a big football game tonight, portugal versus spain. you got a spread of about 50 basis points of portugal versus

spain. portugal is on its way back to investnt grade. it probably shouldn't have been junked in the first place, a late decision. there is a bit of value there, but it is all in the context of this ridiculous -0.4% base rate. these yields are not attractive on their own. they only look attractive because reference rate is deep negative in the eurozone. jonathan: i want to ask you for prediction on the score, because it plays out over the weekend and you might look silly. i want to get to the italian bond market. is 260 a good entry point? alan: we are still underway, but short run, it looks money good in the sense that the fear of rates going higher and a general bond bear market. over time, we have seen it many times before, the market goes from fear to, where can i get an

income? and if you need to get an income in the euro zone, italy is where you go right now, more so than portugal, obviously. i would say the better trade is the front end. these are ridiculously low yields, 60 basis points in italy. that must be seen in the context of a -0.4 reference rate. jonathan: colin, often the perspective on europe is different from london to new york. what are your thoughts on europe and the kind of trades he is talking about? colin: i would agree with the trade with respect to italy, and i would take it back to draghi. i happen to be a person that thinks even though he was, what would appear to be ultra dovish, he did an excellent job. also noted right now in the market is that the ecb is going to end the buying in december, but i took it as that it is still data dependent, and i don't think that is baked into the cake.

going back to the italy bonds, if draghi is going to stay dovish, bonds will still be purchased. it doesn't mean i think it is super attractive, but i don't think it is a bad entry point. jonathan: i know a lot of people itching to shore off german bunds. a lot of people have said for many years that it is the most overpriced security on the planet. any reason to believe the picture for german bunds changes anytime soon? andrea: i don't think so. we just saw decent data come out of germany softer again. until we get that resurgence of growth across the euro area, and you have the overhang of the budget in italy coming up in september, as well as the whole italian drama to play out through year-end, i think it is likely that is a short that will have to be on the sidelines. jonathan: one of the things the ecb and fed have done is put a big bid in for the dollar. in a moment we will be talking about that and emerging markets. everyone sticking with me, colin robertson, andrea di censo, and alan higgins. coming up also, the auction

block, italy. a first major test of investor appetite as political fears subside. that is just around the corner. ♪

♪ jonathan: i'm jonathan ferro, this is bloomberg "real yield." i want to head to the auction block, where the u.s. treasury auctioned over $190 billion this week. i want to focus on the 10-year auction, the yield the lowest since april. demand was strong with the cover ratio at the highest level since january. in europe, italy had strong demand for most of the bonds it sold. the nation sold a combined $6.6 billion worth of notes ranging

from three years to 30 years. finally, in european credit, high yield investors pushing back 4.3 billion dollars in bond sales, canceled or postponed since may. vivo energy became the seventh this year to shelve fundraising plans citing "adverse market conditions." still with me, alan higgins, andrea di censo, colin robertson. colin, i want to begin with you and talk about emerging markets but start with the treasury in that perspective. big worries about the treasury getting away, a significant amount of supply. there's no problem whatsoever so far as i can see. i see it being a problem for other countries. colin: i agree that it hasn't been a problem at all. there was a lot of concern headed into the year, as you said, but i think part of why it hasn't been a problem is because of interest rates in the u.s. and the fact that the demand is still outstripping supply and fixed income in general, and certainly in the united states.

it is a problem for others, and the strong dollar, i think, to me, is the most important piece of the puzzle that will put pressure on the debt of emerging markets. jonathan: do you think the pressures coming from the u.s., the stronger dollar, the issuance of the treasury, the balance sheet unwind, is starting to cause cracks elsewhere globally, ex-u.s.? alan: i think that's right. i think the magic 3% number on 10 year treasuries, we haven't had that kind of risk free income stream for a long time. that attracts capital. but there's a lot of idiosyncratic factors. if we turn to em, what we look at carefully, if em is going to go badly wrong, it will go badly wrong in china.

the fact that the chinese yuan is so well behaved leaves us a little more sanguine. this is what you get compensated for in em, spread widening. typically, we are not in full crisis, but typically you want to look at info during these times. as i said before, it is amazing how quickly the market can go for fears and a certain narrative, and a couple of months later, where can i get that decent income? jonathan: can i tempt you in an argentinian bond that matures in 2117, and about 99 years? it's got a nine percent yield. would that tempt you? alan: argentina, no, but there's a behavioral aspect to 100 year bonds. everyone here is very good at their bond math. 100 year bonds only have a duration of slightly longer than 30-year bonds in the u.k. because we are so long dated. buyers were talking about 10-year breakevens on argentina. from memory, when people first went to argentina, the 10-year breakeven needed to trade at 40. it's on its way there, which is somewhat worrying. you have to see it in that context.

but no, we aren't in 100 year argentina. but we could look to buy dollar debt more generally, more likely we would be a customer of the investment management industry and buy a fund. jonathan: andrea, does that make sense? andrea: absolutely. the selloff we saw across emerging markets shouldn't have shocked anyone given the amount of u.s. dollars in nominated debt. oftentimes, these companies don't have dollar revenue streams to match that debt. the countries that we saw it in, argentina, turkey, they have u.s. denominated debt that is roughly 20% of their gdp. that was a story we could see coming. the pace of it is what shocked the market.

that is because we've seen this pullback in qe in the u.s. a sharp rise in the dollar. the pace was quicker than most markets, therefore it spooked everyone. as the volatility comes down in the coming weeks and months, maybe we catch a bid back to em. jonathan: it was said earlier this week that the united states is seemingly on a suicide mission. in equally unsavory terms, i might suggest that perhaps the united states could be going on a murder spree, the financial equivalent of one. the pain is caused elsewhere. what i've seen is an economy that is doing well, financial conditions tighten abroad. crack's emerge abroad. you mentioned china. chinese data this week wasn't great, and it seems to me it is buy america and get concerned about everything else. is it going to stay that way, or does it turn? does it turn the other way, and is the feedback loop going to come back to the u.s.? alan: it is not sustainable for the u.s. economy to be so strong. going back to the start of the program, for the u.s. economy to be so strong and the rest of the world wakening, either the u.s. is going to weaken, and there doesn't seem to be many signs of that, or the rest of the world is going to pick up.

it is hard to say, but our bias is that after euphoria in europe and now depression in europe, we'll see some kind of rebound in europe in particular. turning to china, this week's data was on the weak side, but going back the week before, we had really good export and import data out of china. if there is a problem in china, they are the canary in the coal, and that is relatively stable. look, there are some issues, started fundamentally by the 3% 10-year yield and attraction of capital, and some idiosyncratic issues within certain countries, but generally, in a risk-off environment in em, you want to look to put money in and not take it out. jonathan: i want to get to the leverage story in a moment. colin robertson alongside andrea di censo and alan higgins.

in the markets this week, a check on the treasuries. twos, tens, 30's shaping up as follows. front end up five basis points to 255. you end up with a flatter yield curve. still ahead, the final spread, the week ahead, featuring a central bank all-star panel. powell, draghi and kuroda. this is "real yield." ♪

♪ jonathan: i'm jonathan ferro, this is bloomberg "real yield." it is time now for the final spread. over the next week, another round of data on u.s. housing and some central bank decisions from the bank of england, mexico, and brazil. plus, the opec meeting to look ahead to. draghi, kuroda and powell altogether. a lot of stuff you don't want to miss. still with me, colin robertson,

andrea di censo, and alan higgins. i want to wrap things up with a conversation i've been having through the week. basically, whether you want leverage loans or exposure to high yield. the debate seems to be either/or. how are you thinking about that debate right now? ea: real, it comes down to rate sensitivity. that's what were talking about these two asset classes. both of them, more sensitivity, more attractive in a rising rate environment. we think there's value in the bank loan market itself. however, what we have seen is net issuance on the high side, whereas in high-yield markets, you have the market technical of roughly over 20% less issuance this year than in previous years. that is a boost to high-yield

markets. what worries me in the leverage loan market is this covenant-light conversation. that's going to come to fruition in the next downturn. what will recovery rates look like across the bank loan market should we enter a downturn again? jonathan: often we talk about a particular asset class or security, but don't spend a lot of time talking about how easy it is to buy and sell those securities. someone said to me this week that it wasn't so long ago that you were settling leverage loans via facts and it could take up to a month. things haven't changed much, have they? colin: they haven't, and it is a reason that it makes the market difficult for me to find attractive. the high-yield market is obviously, in a different sense, is much more tradable. also, with respect to high-yield versus leverage loans right now, the discussion about the demise of the high-yield market has been going on for quite some time. i've had it with you before. i would point out the option adjusted spread has been between 320 and 380 for basically 18 months. i have no reason to believe it won't be within that range for the next six months at least. and with my view that interest

rates will not put pressure on high-yield market, default rates are dropping, i find it a more attractive trade. jonathan: in high-yield in the united states, as many people have pointed out, leverage peaked a couple of years ago. the supply story has been supportive as well. where do you stand on the debate at the moment, as to whether you want to have more exposure to the leverage loan side or to high-yield? alan: a bit of relative value because we've got a european lens on as well. high-yield in the u.s., nothing wrong with it. defaults remain low and spreads are on the low side. i don't disagree, don't see any big change. we have a little bit of asymmetry in loans. jonathan, i also remember the t + 20 and sending faxes. it has not changed. the way we access leverage loans is via investment trusts or securities, that create permanent capital for the mandates when we can. the area of high-yield we like, which is a bit of a european market, although you do have it preferred in the states,

basically subordinated financials. to be fair, some of the subordinated financials is investment-grade, but it has the characteristics that we are talking about, not too much interest rate duration in effect. so, if you like effective duration quite low, high yields, and our belief is that you are overcompensated for memories of 2008 and 2009. it has to the national champion banks, and the way we look at it is there is a big transfer from equity holders to bondholders. these are cocoas, and they need to be sized properly, but are the most attractive subset of high yields for us. jonathan: i think many viewers will be thinking about this, you mentioned high-yield over leverage loans. one is secured and one is not. is the capital structure a more important component? colin: i think it's the most important component. even within the high-yield

space, as we've already discussed, i think you are fine being in the lower rated areas of high-yield. but the point is, the strength of that guarantee and the high-yield fixed income space is much preferred. jonathan: colin robertson, andrea di censo, and alan higgins. that's it for me, i clearly need the weekend. that's it for us, we will see you next friday at 1:00 p.m. new york time. this is bloomberg tv. ♪ retail.

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♪ >> president putin and mohammad bin salman meet before the next opec meeting. the trump effect. trade skirmishes rattle every market, and the president adds volatility to the commodity world. and it's getting hot in here. the drought rattles though market in the u.s. ♪ alix: i'm alix steel. this is "commodities edge."