jonathan: from new york city, i'm jonathan ferro. 30 minutes dedicated to fixed income. this is "bloomberg real yield." increasing leverage in a rising environment. chasing pain into investment grade credit. the transatlantic spread widens. mario draghi going nowhere fast. pricing in political risk. looking at a string of key elections in emerging markets. we begin with corporate america boosting leverage. >> right now it is still pretty

attractive to borrow. you have seen a pretty meaningful upsurge and sizable deals. companies are raising $20 billion, $30 billion, $40 billion of money at one go. >> increased leverage on balance sheets is absolutely a risk. i think a lot of companies are much more healthy in thinking through how much risk they want to take, how much debt they actually need. it is definitely an area of concern. >> the economy is on a very strong growth track, no question, and that supports leverage. -- and it always happened in the past because economies are indeed cyclical. when do hit a tipping point, where is the tipping point? it goes back to the elephant in the room, the trade wars. that is what could cause a tipping point. jonathan: a full house around the table. keenan, oksana

memani.and krishna withna, i want to begin you and bring up the subject of what's happening in credit at the moment. investment grades wider. high yield has stayed tight. what do you think about what is happening at the moment? krishna: investment grade is quite wide compared to the beginning of the year, almost 35 basis points. that is very significant. the reason is issuance has been far more robust than in the investment grade market. core buyers of investment grade credit, overseas investors, have been missing in action. that combination has put us in a bit of a pickle. hand,ield, on the other the technical side, in better shape. fundamentals are really good, together holding nicely. jonathan: jim keenan, anything to worry about? clearly, there are companies out

there that will leverage in the balance sheet. is there a worry for you? i agree with krishna with high yield but take a step back, i don't think you are seeing, from the leverage you are seeing in the corporate space, something that you should be worried about from a economic perspective. certainly creating more risk at the lower risk quality of the investment grade space as they sought to put more leverage on their balance sheet and you see a big boom in bbb leverage. that is more idiosyncratic. they will create some technicals, you are seeing that in investment grade. if there are downgrades, that would filter into the market. earnings are still strong and that is why you are seeing support at the high-yield level. jonathan: and we have consensus here? oksana: i'm always here to create dissonance. i would agree certainly that we n widening.

investment grade is down almost 4% this year. that is really being affected by three major factors. seen thesey, we have numbers. repatriation is another big one. many of those funds were held overseas in investment type investments. so there is supply coming in there. and as krishna mentioned, less demand from overseas investment. ,he interesting thing, too currently about 14% of the investment grade space has over four times leverage. part of look at the bbb investment grade, which is the lowest part, there is four times the volume there than high-yield. historically, that ratio is at about two. when you think of a downgrade cycle, you think, can that bleed into supply in high-yield, given

the overhang has gotten so big? jonathan: is that something you are starting to position for, just aching about -- thinking about? oksana: our position right now is quite conservative. we see these tipping points across different markets and valuation do not have enough room in them for the kinds of uncertainties that are happening out there. whether we are talking about the yield curve, tariffs, all of these things can go a couple of ways, but either way they go it will create volatility for the market. we believe being conservatively positioned here matters. jonathan: a lot of people would say go up in credit quality. what is going up in credit quality, when you go from high yield to investment grade? in some respect, that is where it has become less quality. oksana: what has it done for you this year? that is something i've been

saying for a while. higher quality credit is not necessarily safety in the classic sense of the word given that we are going through the cycle right now of potentially higher rates. and that has nothing to do with what the fed is doing in terms of the amount of hikes, just hasn't do with supply and demand. krishna. i can hear krishna: in the short-term, when you have economic conditions relatively robust, quality does not do much for you especially when rates are rising from the absolute return standpoint. , on the exit return basis as well. having said that, if you hit a in 2019, 2020, and you are planning, positioning for that, upgrade makes a lot of sense. in that scenario, given the amount of leverage we are talking about, high-yield will have a far worse time that we

have had investment grade so far. explanation would be that you see more credit risk and it would not be a duration story. right now it is a duration risk story, which is why high-yield has a performed investment grade. jim: there are a fair amount of balances of risk. some of this is where in the curve are you? investment grade, as you look at 10/30 spreads, they are starting to widen out. inflation is starting to become a question. at the same time, everyone is wondering where we are in the economic cycle, maturity of the business cycle. one thing that you see right now is going into senior secured bank loan risks. adjusted basis, it's done incredibly well because it is at the top of the stack of corporate earnings. that is why it's done well relative to investment grade or

high-yield. hard to argue going up in quality with a curve as flat as it is today. muchre not really getting of a compensation by taking on more duration risk, which is what would ultimately be the saving grace in a recessionary environment. the curve has gotten so flat, you can earn 2% and then the pickup for going further out is so minimal, but your duration risk you are taking on is so major. the question for investors is where the you believe there is an imminent recession, or if you believe the economic data, the policies of this administration, including tariffs, which is inflationary -- whether all of those things are good for bonds, or an environment in which cash could outperform bonds. krishna: let's not conflate duration risk with credit risk. those are different levers and you can move both of them. if you want a short duration and credit risk, you could buy loans, as jim was suggesting.

if you want real duration risk, you can buy long treasuries. from a poorhe two for the construction standpoint does not really make much sense. in today's environment, jim is right. loans relative to high-yield and perhaps mortgages or treasuries relative to high-grade is the safety trade today. going back to where you want to be on the capital structure? krishna: absolutely. credit risk is meaningfully lower, and especially when you compare spreads. investment-grade spreads are widened, but relative to mortgages, for example, they are not extraordinarily wide. a trade from's get you, jim, to wrap this up. where would you be putting money right now? as of right now we prefer

the loan market. i don't think you are getting paid in the risk to go down in quality in the capital structure. there is value in the high-yield market, but talking in broad terms, we still like loans, finding opportunity in investment-grade or in the high-yield market. jonathan: jim keenan is staying with me alongside oksana aronov as well as krishna memani. coming up, the auction block. two of the biggest offerings in 2018. a lot more on that in just a moment. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield."

we want to head to the auction block. this week we got the second and third largest corporate debt sales of the year. bayer offering a $50 billion sale. it also offered $6 billion in a euro sale offering helping to finance an acquisition of monsanto. they were then topped by walmart to help itsds acquisition of clipart. flip kart. 81%, thebidders bought largest share they had taken ever for that maturity. still with me is jim keenan, oksana aronov, and krishna memani. begin with youto with what we are seeing in rates. the story with the ecb and the fed, they are worlds apart in

terms of their gardens or interest rates. how do you expect that story to evolve? oksana: it seems like they are couple years apart. the ecb's were the fed was a couple years ago in terms of guiding toward the end of its bond purchasing program. it looks like the end of the program is on track to the end of the year, over a trillion dollars in negative yielding debt. it is unclear where the demand for those bonds will come from. we got a taste of that here in the u.s. and the fed is not even net negative liquidity mode yet. there is too much focus over how many more hikes the fed will do this year, what will happen with the flatness of the yield curve. the most important thing happening in the bond market, rates, is the reduction of the fed's balance sheet. certainly, the supply-demand imbalance of that is creating, along with other demand provider

stepping away, such as sovereign buyers, russia -- not one of the largest but there was a story this week that they reduced their treasury holdings by $50 billion. banks are becoming less regulated which means they will provide less support for that part of the market. that 10-year in point of the curve will continue to struggle and move higher, not in a straight line, but it's hard to imagine a scenario in which the 10-year goes back to the high 1's. jonathan: basically, quantitative tightening from quantitative easing for several years. you have the fed, boj, and european central bank, and you get to the back half of this year were things get interesting. what are the implications for markets? when the ecb stops buying and the fed's balance sheet rolls off more aggressively? krishna: trying to figure out the direction of rates based on just that supply and demand

right,, i think, is not for the following reasons. in economic terms, you get to an equilibrium. interest rates are something that comes out of reaching that you go live for him rather than supply and demand getting you there. what that means is it depends on what your expectations are with respect to the economy. the ecb may not be buying bonds anymore but the european economy continues to slow down the way it is, then the implications are very different. the same applies for the fed as well. the u.s. economy is accelerating going into the second half. as long as it continues to do that, rates probably rise as a result. if that is not the case, things will revert that. if the ecb was not in the game, do economic conditions exist to justify the german curve to be negative about six years? krishna: ecb is in the game, so

that is like saying, if the sun was not there, how would the day look like? central banks have an enormous influence from a policy standpoint on where rates are. ecb is in play because they want to support the economy. i don't think you can take it out and arrive at some natural rate of interest rates. jonathan: i'm guessing from the way you are sitting, you are more worried about what is happening in europe and krishna is. oksana: yes, and here is why. you cannot discount what the ecb has done. they have created a essentially artificially priced asset class in europe. likeeason that it feels europe is a couple of years behind the u.s., asset class was guiding us run with to do. the markets were dismissing it, continuing to price based on the sentiment that the fed would back off. that is what's happening in europe. i spent a week in europe with

investors, and that is the sense you get. investors are generally discounting for now that the ecb will really end this bond buying program by the end of the year and move toward normalization. out,that sentiment is even starts to move out, you'll see significant movement. what are rates, academically speaking? plus the-term rate rate of inflation, plus the rate of a premium. in europe, that does not even get us to a -30 rate on the german five-year. away from rates in europe and toward high-yield, if it is hard to justify economically speaking, what is happening with german rates, even harder to say what is happening in the corporate bond market. you get the feeling that it is in a bit of trouble going into next year. when you get the handoff from the ecb, it is hard to justify where high-yield europe goes.

different take a hearing your point with quantitative tightening versus easing, this is a global picture. no doubt coming out of the commodity cycle where you had enormous stimulus coming into the market, the business cycle maturing, central banks are starting to remove policy, and you are seeing tightening. i think that policy is becoming for more localized than in the past 10 years, so you will see variations of asset prices and returns between regions. but no doubt when you look at the economic picture in europe there is more volatility. not as stable as what you see in the u.s. you don't have the same kind of backdrop of support from the economic picture right now which is why you still need the central bank to be more accommodating than what you are seeing in the u.s. jonathan: in terms of the ecb, looks like they will be for a long time. let's get a check on the

markets. let's get a check on the treasuries. the 2-year has been remarkably stable over the last couple of months. around 2.55. a 30-year coming up a basis point. the 10-year coming in. not a lot of action considering the news we have had the past week. still ahead, elections in turkey and mexico. em is next. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. this weekend, we get the elections in turkey. next week we have the mexican election as well. plus, another round of u.s. economic data and the second leg of the u.s. bank stress tests. closely watched seven-year

treasury auctions. still with me is jim keenan, oksana aronov, and krishna memani. krishna, i want to rev up with some final thoughts on e.m. going into the mexican election. are you still positive on emerging markets? krishna: yes. we have been positive and wrong but we are sticking with that position. the underlying piece was driven by the fact that economic growth in emerging markets is relatively stable and the dollar cannot strengthen. what has happened is the dollar has strengthened. at some point, the demand for capital to fund the u.s. deficit will bear on the dollar and that will be the turn that we are waiting for. now the wishes in emerging markets have actually improved so we are sticking with that position. jonathan: didn't we see that affects related moved to the deficit last year? are we seeing enough of that? krishna: we were not counting on the budget deal last year. the deficit picture has certainly deteriorated.

in that environment for the dollar to strengthen meaningfully and sustain itself, i think, is unlikely. reminds me,sana negative and right on emerging markets. what is next? all the reasons remain for why we're negative going ,nto 2018, the fed normalizing all of the protectionism around the world, stronger dollar. none of these things will be constructive for e.m. at these prices particularly. say thatar krishna there is still positive sentiment around e.m., i struggle to understand what kind of price appreciation you can get from a better pricing of 290 basis points over u.s. treasuries. fundamentals are strong in many parts of the market, we don't argue with that. it is just hard to understand where that price appreciation will come from as the fed continues to tighten and do all the things it is doing, and

protectionism continues to roll around the world. we have not yet seen technicals really hurt that part of the market. we have not seen a significant amount of outflows. technicals can do very bad things to the market, as we learned with high-yield in 2015 and 2016. fundamentals were limited to the energy part of the market but everything fell out of bed. when we say we like e.m., it is e.m. fx and local rates, not credit spreads. jonathan: to wrap things up, a quick three questions. you know how this works. first question, have we seen the tight of the year in u.s. investment grade? >> no. oksana:. no. jonathan: have we seen the wide on that spread? jim: no. oksana: no. jonathan: world cup winner.

e.m. or dm? jim: not the united states. oksana: do i really have to? jonathan: indulge me. oksana: i will go with the e.m.. trying to ask americans about football. jim keenan, krishna memani, oksana aronov. i'm not doing that again. trying to ask americans aboutsee you next fri. this was "bloomberg real yield." this is bloomberg tv. ♪

>> i'm mark crumpton with first word news. paul manafort's request to dismiss a money-laundering charge has been rejected by a federal judge in washington. manafort is also charged with

conspiracy, making false statements, obstruction of justice, and failing to register as an agent of ukraine. his bail was revoked last week and after prosecutors claimed he tried to tamper with witnesses. his trial is scheduled for july 25 in virginia and september 17 in washington. diplomats say israel is following the lead of the u.s. in pulling back from the u.n. human rights council. israel has not completely withdrawn from the body but has her or they reduced its participation. the country has had a tense relationship with the council, accusing it of unfair bias while ignoring or underplaying rights violations by other countries, including its own members. portonflict in yemen's city is putting pressure on hospitals and medical centers, leaving many unable to handle the growing number of casualties. medical officials say they don't have the necessary equipment or medications to treat patients.