leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. jonathan: from new york city, i'm jonathan ferro. this is "bloomberg real yield." jonathan: wrapping up the first half with treasury bears. facingg-market assets one of the worst quarters in almost three years. how safe is the new safety trade? we begin with a big issue. can u.s. markets

decoupled from the rest of the world? >> the u.s. looks like a better place to be than the rest of the world. >> group is living here. the economy tends to do well. they could be isolated and its long as the sharks are not massive. >> we are looking at economy that is driven by the consumer. the consumer remain strong. >> the u.s. will not be able to the couple. it is part of the global economy. >> you are starting to see weakening probably in the u.s. high-yield bond market, even though continued that people continue to say that the economics are solid. >> it depends on if the trade battle gets out of control, which i do not think it well. but if a mistake is made, and you are playing very high-stakes right now -- if a mistake is made, then this is going to get ugly for markets. jonathan: joining me around the table is priya misra, head of

global rates strategy at td securities, bob miller from blackrock, and from texas, mark okada of highland capital management. talk about the concept of the coupling, whether the united states can do that and whether that is what we are seeing. priya: i think growth can somewhat decouple. equity markets don't really decouple. -- they areat the not really correlated. global bond yields are declining. germany is at 30 basis points. the spread can only widen so much. the u.s. economy is pretty strong, inflation is a target, underemployment rate continues to decline. we will see a flattening of the curve. i'm skeptical that the u.s. can continue to grow. we had a significant pro-tax

cuts. need for growth momentum to pick up. jonathan: one pocket of credit and fixed need for growth momenm income is high yield. we see this amount asia, europe, vs., say, the united states. high-yield is cracking everywhere. what does this chart look like as we go to the rest of the year? bob: the higher quality, more rate sensitive. it has impact -- and fact struggle to this year along rate sensitive fixed income. has done pretty .ell great sensitivity of high yields -- our expectation is that that probably continues in the second half of the year in growth sensitive parts of the market

can like the growth sensitive parts of the stock market do ok. really goodat is a point. to build on that, mark okada, the duration story that baba points out. the other is issuance. we are seeing big issuance this week to the high-yield. is the story taking a bite out of high-yield? mark: i think we certainly could see that. we could see an increase in issuance there is that starts to heat up. it takes time for the deals to come together. we will see better issuance in the second half. given the technicals, 33 weeks of outflows in high yields, that is leading to a bit of widening. jonathan: a conversation i have

a lot of people is the difference between high-yield and leveraged loans. where is blackrock on the debate right now? bob: tricky question. the loan market has been a good place to hide. the front and of the yield curve in general offers a margin of safety now. 2.5% to-your notes that 2.5% notes seem fair. relative to the high-yield market, i think that is a trickier trade. i would rather talk about what we are going to talk about next. relative toitch loans and/or high-yield. i don't have a strong opinion about the relative to high-yield that the structure. jonathan: i know, mark, that you

do. where does it still play out, mark? mark: i think it is a function of the actual fundamentals and when you are getting paid for them. we looked at spread vs. turn of leverage. it is surprising we can even with the compression we have seen across the leveraged loans, still 73 basis points. from the fundamental standpoint, you are cheap, although it certainly tightened a lot. we have gotten the rate dynamic that has been helpful, and will continue to be helpful. you look at the expectations for the hike in september and december. our call for four hikes this year is in play. continues, i see the

relative dynamics to be fairly good. technicals are going to be good in this space. we don't have enough issuance. there is a lot of demand for the floating continues, i see the relative rate. high-yield.oans vs. jonathan: there is a lot of demands for the flowing right. why we have seen some of the underwriting standards deteriorate, because there is so much demand. again and again i am told that this is higher up on the tax structure. you are only higher up on the tax structure is there something below you. a lot of loans come into market. average loans don't have anything below them. how important is it to dissect the market at the moment and pick the right things? mark: we have had a recent story here that is interesting. american tire just missed their numbers badly. they lost key customers. the bonds went down 80 points in two months. the loans are down 30 points. -- nothing is going to be immune in the scale and size of the

market, to the extent that you miss numbers and something bad have penciled it is not a function of looking at leveraged loans versus high yields. it is a function of knowing when and don't. this is the market where we have said over and over again that you need to be defensive. you need to avoid things like this because when they do happen -- the bonds and the loans were at a premium in the beginning of the year. down 80 and 40 points in both tranches. jonathan: you bring up an important single-and story. we had toys "r" us in september, completely rolling over. would you look at things at the moment -- is this adequately pricing in risk? bob: the market has -- we're definitely experiencing a tightening of domestic financial conditions, and it is going to continue. it is highly unlikely that the

fed will pull back anytime soon. they will meet expectations in september as well as perhaps in december. global financial conditions are tightening and u.s. financial conditions are tightening. it will create eventually, posed fiscal stimulus, growth pressure, and that is when you will see some of the cracks show up. jonathan: you sound a little more defensive. priya: i was just going to add risk premium generally is rising. we are in an environment where liquidity is not that great. to pickwhy you have your spots. it is extremely important. there is a rising tide that lifted every boat. that is gone. i completely agree with bob. as the financial conditions are tightening, you have to be careful what you own. it is not obvious that the liquidity provider is out there. jonathan: priya misra along with bob miller and mark okada.

coming up, they may be chewing on the world cup in russia, but the biggest bond miss since 2015. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." want to head to the auction block, where more than $230 billion of treasuries were offered this week. seven-year notes at the lowest yield in three months, with a ratio weaker than the last seven-year note sale. in italy, the country had its 10st option of five- and

year get since the new populist coalition took office. even with the yield on th five-year bonds that are high on the eurozone. in russia, the countries on track for its biggest bond issuance missed in years. it sold half of the billion dollars it wanted to borrow this quarter. still with me around the table, priya misra, bob miller, and joining us from dallas, texas, is mark okada. want to get to the story of treasuries. we have seen the call from goldman sachs. book your profit. you have seen the high on the u.s. 10-year. whether you think we have seen the highs of the u.s. 10 year. priya: high for the next few months probably. i'm not sure of high in a while. at 285 we are pricing in some of

the risks. the u.s. economy is pretty robust. when was the last time the fed chair said the economy was great? jonathan: in a while. priya: we have heard the economy is good. will continue to hide. where i get nervous is when they go above neutral. financial conditions have not tighten to that much. rates will continue to rise a little bit. when he comes out of other risk as -- money comes out of other risk assets. 3.20 -- it is 3 or jonathan: you guys at blackrock have been in credibly ahead of the curve on this. things would rotate out of elsewhere and into the front end. we are in the early innings

of the marginal unit of capital relative to where it has been allocated over the past several years. the bulk of capital that sits in longer-duration assets, much of it is for regulatory purposes, and it is not going to switch into the front end. the marginal dollar has started to become attractive in the front end of the yield curve. we are seeing it in the flow into funds. jonathan: we were looking at charts during the commercial break and hopefully we can put one of them up. you jumped on the one chart that pointed out it has been a duration story across much of the price action we have seen year to date. this goes back to the point we made at the beginning of the show, the assets that have performed worst you today are the most sensitive to the withdrawal of conditions in the u.s. specifically but globally

to some extent. some of those are trading -- i think there are two places where there is the reasonable margin of safety. one is the front funny to of the treasury curve. incremental 75 basis points of priced into the front end of the curve. the fed may meet that expectation, it may not. it probably will. nonetheless, it is priced for a. priced into the front end of the curve. -- priced for it. this stuff is down a lot. there is argued we a margin of safety there that the hard currency spreads are above the high-yield spreads in the u.s. that is a very unusual relationship. it's like me that there is value -- priced for it. there. it is also the cross hairs of trade was an u.s. tightening financial conditions. there are challenges, but it is priced to some degree for the challenges.

surehan: i'm not we have seen capitulation yet. where do you stand on things in the moment? mark: i think it is too early to call. it is certainly something we didn't call for the year. that will put a lot more pressure. refinancing risk in the bond market there. that is repriced as dramatically wider. it is a continuation of the theme about how technicals are driving fundamentals. the trade has been very popular. what i see for most people is they like em. the extent that that is not the case can we get more fundamental weakness and

outflows, it is too early to call the all clear there. priya: as long as real rates keep rising, closer to 1% it is . big headwind for em the biggest macro for the next few months is how does european data improve. first quarter weakness was supposed to be easter. easter is long gone. we have not seen that improvement. the dollar continues to strengthen. why put money in the yet? -- yen. jonathan: someone earlier on the program said that priya misra nailed this this year. priya: as the fed ended to be, the rates most significantly. i don't get the sense that productivity is picking up. the sense of equilibrium real rates that the economy can handle has not really changed,

despite all of the positive data. 1%.ear real rates will be every time they get close to that point i trade long. misra great to have you with us. robert miller from blackrock and mark okada of highland capital management. two-year by on the about two basis points. 8. 30-year coming in this conversation coming up shortly. the week ahead featuring the mexican election and the payrolls report and of course fireworks in the united states of america. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro.

this is "bloomberg real yield." coming up over the next week, mexico will you holding its presidential election. it will be a shortened trading week due to the fourth of july holiday with of the early close of trading on tuesday and market close on wednesday. we will get fed minutes, the jobs report commend his scheduled start of u.s. tariffs on $34 billion of chinese goods. so with me, priya misra of td securities, bob miller from blackrock, mark okada of highland securities in a dallas, texas. whether we have been through 30 basis points ever before and not inverted, and the response i got was that we did. where in the mid-1990's we reached that level of 30 basis points and then came back in the cycle continued. are we in a mid-1990's-type scenario, or late 1990's-type scenario? priya: two things to that.

we are not seeing a pickup in productivity. with the fed goes above neutral, that curve will continue to flatten and invert. the fed says we have to tighten but we are not changing the long-term right. the other is global rates. i would say that the forecast has that long-term right. the other is global rates. curve continue to zero. global growth doesn't really budge. bob: the level of rates in the 1990's was considerably higher. influencednd is most by domestic purposes. iya mentioned earlier, the long-term premium is very correlated. the efforts of the ecb, etc., to suppress real yields and keep the structure very low as a gravitational pull.

the curve is going to stay flatter than i originally theght i'm not sure that 30-basis point curve today is sending a signal sent in the mid-1990's with much less activism. jonathan: the majority of our viewers would agree with that as well. arc okada, does that resonate with you? mark: i give myself the grade for the cost of the year coming into january -- this is an area where i give myself b or b-, because we do not think the curve what flatten this way. i am sticking with the call. i'm not sure that we continue to flatten. i'm getting more concerned. what i'm seeing from the global growth standpoint, you have got to be a little bit worried about

that. long-term, i believe that we are normalizing across the board for the monetary policy standpoint. jonathan: mark okada, but have to me. rapid fire round i was too quick essence. keep it short. have we seen the high of the u.s. 10-year yield for 2018? priya: yes. bob: no. mark: no. jonathan: leveraged loans or u.s. high-yield and the year 20 to. priya: leveraged loans. jonathan: i know you didn't want to answer this. bob: loans. mark: loans, they're both right. jonathan: come on. next friday ahead of payrolls, there isn't a presidential tweet, are you run a be bearish for the payrolls report? priya:no.

i think he has been told not to tweet. bob: no. mark: same. jonathan: guys, where's the fun with this? [laughter] jonathan: freedom is right, robin miller, mark okada -- priya misra, bob miller, arc okada, great to catch up. this was "bloomberg real yield." this is bloomberg. ♪

ma i am mark crumpton. rk: president trump says he unleashed an economic miracle with this tax cut last year. the president spoke at a white house event marking the

six-month anniversary of the passing of the 1.5 chile dollars measure. -- $1.5 trillion measure. candida is announcing billions of retaliatory tariffs against the u.s. in response to the trump administration's duties on canadian steel and aluminum. beginning july 1, some items will be subject to taxes of 10% or 25%. the canadian foreign affairs minister announced the measures today in hamilton, ontario. ms. freeland: canada has no choice but to retaliate with a measure of the great reciprocal dollar for -- perfectly reciprocal dollar for dollar response. freeland said, "we will not escalate and we will not back down." president trump once replacement for anthony