i am jonathan ferro with 30 minutes dedicated to fixed income. this is bloomberg real yield. coming up, wrapping up the first half with treasury closing down emerging-market assets facing down one of the worst quarters in almost three years. just how safe is the new safety trade? investors flocking towards leverage loans. can u.s. markets be coupled from the rest of the world? >> the u.s. rate looks like a

better place to be than the rest of the world. >> there is one strong island those performing well. u.s. economyhe continues to do well and it can be isolated as long as the shocks are not massive. >> we are still looking at an economy driven by the consumer. when we think about the economic health of the u.s., still strong. the consumer remain strong. >> the u.s. will ultimately not be coupled into part of a global economy. >> you are going to see some broad weakening in the u.s. high-yield bond market. people continue to say the economic are solid. trade gets out of control, which i don't think it will. i think there will be a resolution. if a mistake is made, and you are playing high-stakes right now. if a mistake is made, then this is going to get ugly for markets. miserable is pretty a miller and from dallas

texas is the cofounder and cosi a.l. pilot capital management. talk about this concept of the oupling. -- dec >> i think markets cannot decouple . if you look at premium globally they are highly correlated. that is because global bonds needs are declining. the tenure german yield is at 20 basis points. that spread can only widen. the front end will pick up because the fed is saying the u.s. economy is strong, inflation is that target and unemployment continues to decline. are time, analysts skeptical the u.s. can continue to grow. we have a significant sugar high

from tax cuts. as that fate i think we need global growth momentum to pick up for the u.s. to continue to print about 2% gdp. >> one pocket of craddick and -- credit and fixed income is among asia and europe. high-yield is cracking pretty much everywhere. what does this chart look like through the rest of the year, bob? >> it is important to look at the composition of the high-yield market. the higher quality, more rich incident shorter duration -- more rate sensitive shorter duration part of the market has extended this year. the higher risk, less rate sensitive of the high-yield market has done well. bake bifurcation in returns of quality and rate sensitivity of high-yield. that probably continues in the second half of the year in the growth sensitive parts of the do ok much like the

growth sensitive parts of the start market do ok until we have it legitimate risk of decelerating growth. >> the three things that have been in support of high-yield are the duration story, also the big issues this week coming through high-yield. the typical backdrop is very supportive. as this artist had a bite out of had this started to take a bite out of high-yield? at issue across the m&a spectrum as that starts to heat up. we had a big positive coming into february. we are probably going to see some better issuances in the second half. had 32 weeks about close in high-yield, that can certainly lead to widening. >> the conversation i have with a lot of people is the division between high-yield and leverage

loans in the u.s.. black rock that debate, leverage loans or high-yield? >> the load market has been a good place to hide. i think -- the loan market has been a good place to hide. we think the front end of the yield curve offers a good margin of safety. the loan market, we are definitely witnessing a deterioration in underwriting standards throughout the market over the past quarter or so. relative to the high-yield market, i think that is a trickier trade. i would rather talk about bmr currency because that gives us an easier switch. relative to loans at high-yield. i don't have a strong opinion about the relative valuation of loans to high-yield. >> mark, i know you do. it has been your big trade. --ns over high-yield come up

high-yield, how does that play out? >> i think it is a function of fundamentals and what you get paid for them. we looked at spread versus turn and surprisingly, even with compression we have seen across leverage loans air at 73 basis points. from a fundamental standpoint you are cheap even though it has tightened. rate dynamic that has been helpful and will continue to be helpful if you look at the expectations for a hike in september and december. i think our call for four hikes this year is in play. as that continues, i see the relative dynamics to be barely good. technicals are going to be good in this space. we don't have enough issuance and there is a lot of demand for

floating as people want to play defense. i like loans versus high-yield. >> there is a lot of demand for floating rate. that is how we have seen the underwrite extension deteriorate. to what point is this a safety trade? you are high apply cap structure -- on a cap structure come on if something is below you. leverage loans don't have anything -- how difficult is it to dissect this market and pick the right thing? >> we had a recent story that is interesting. -- those bonds went down 80 points in two months, loans are down 40 points. nothing is immune with

the scale of this market that you miss numbers and something bad happens. it is not a something of leverage loans -- a function of leverage loans verse high-yield, it is a function of what you own versus what you don't own. you need to be defensive and pick your spot. you need to avoid things like this. when they do happen, these bonds -- the bonds and loans were at a premium at the beginning of the year. we are down 80 and 40 points. >> you bring up an important story. that is not the only one out there. we had toys "r" us in september rolling over. would you look at things of the moment, as is a market that is adequately pricing risk? -- we areket has definitely experiencing a tightening of domestic financial conditions. it is going to continue. it is highly unlikely the fed is going to pull back anytime soon.

they're are going to meet expectations in september. global financial conditions are tightening, u.s. conditions are tightening, it is going to create some growth pressure and that is what i think you will see some of the cracks show up in more leverage markets. >> you sound more defensive. priya? >> i think risk premium is rising. we are in an environment where liquidity is not great. you have to pick your spot, that becomes important. when we had qe and cash it was this rising tide that lifted every boat. that is gone, i agree with bob. as financial conditions tighten you have to be careful what you want. everyone is rushing for the exit. it is not good for liquidity providers. coming up on the program, the

option bought. biggestia posted its bond since 2015. this is bloomberg real yield. ♪

>> this is bloomberg real yield. i want to head to the auction block where more than $240 billion of treasury were offered this week. i want to focus on the $30 billion sale, the lowest yield in three months. a ratio of 2.53 which is weaker than the last 70. in italy, the country had its first auction of five and 10 year debt.

the sale posted a bid to cover ratio, the lowest anomalous the year. their five-year bonds are the highest in the eurozone. after greece syria russia is on track for its biggest bond issuance miss, they sold half of the money that wanted to borrow. that is the worst result since 2050. priya, bob miller, and mark okada. priya, i want to begin with you. basically just -- book your trade, book your products. i'm cynical for -- book your profits. i'm cynical for morgan stanley. whether you think we have seen the high of the u.s. 10 year? >> high for the next few months probably. not high for a while. we are in a to 6310 type range.

at 285i think the pricing is in some of the wrist. the u.s. economy is still pretty robust. the fed chair said the economy is great. we heard the economy is great, -- i think the fed is going to continue the hike. 2% on the fund rate is not interest. financial conditions have not tighten that much. i think rates can continue to rise. get about 3% i think money comes out of other risk assets. that is what ultimately caps it. have we seen that theme park to emerge -- that theme start to emerge? how things would rotate out of elsewhere and into the front end? have we seen the bulk of that play out? >> i didn't we are in the early innings of the marginal unit of capital coming into the front

end of the yield curve 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. it is not going to switch into the front end. the marginal dollar has started to become attractive in the front of the occur. we are seeing it in shortened businesses as well as the flow it are funds. various asset classes 32018. you jumped on the one chart that pointed out, it is that i duration story across much of price action. >> this goes back to the point beginning,d in the assets that have performed worst are those that are most sensitive to the withdrawal of accommodative financial conditions in the u.s. specifically and globally to some extent. the most duration sensitive, highest quality assets suffered

the most. some of those are trading -- i think there are two places where there is a reasonable margin of safety. ne is the front end of the curve. you have a margin of safety. the fed may meet at expectation but they may not. you have a modest margin of safety. one topic from earlier is hard currency em. arguably there is a margin of safety there. hard currency spreads are above high-yield spreads in the u.s.. that is unusual. there is some value there. it is also in the crosshairs of trade boards of china deceleration, u.s. tightening financial conditions. there are challenges but it is priced some degree for the challenges relative to asset classes that don't have meaningful margins of safety. >> let's talk about emerging

markets. i am not sure if we have seen a capitulation. many people are still bullish on emerging markets. where do you stand? >> i think it is too early to call. if the dollar continues to get stronger, that is going to put a lot more pressure. you have a lot of refinancing risk in the bond market. your tip-off point, i think he is spot on that it has repriced dramatically wider. it is a continuation of the team about how technical their driving fundamentals. there are overpowering fundamentals everywhere you look. this trade has been popular in what i read and see for most people. they are still leaning into it, saying it is cheap. to the extent that is not the case and we get more fundamental weakness and outflow, i think it

is too early to call the all clear. long as real rates keep rising, the u.s. 10 year rate is close to 1%, i think that is a big hindrance for em. is,biggest macro variable does european data improve? we are waiting for the second quarter improvement in european data. we have not seen an improvement. if that doesn't not happen and dollar continues to strengthen, why put money in em? >> i mentioned you were coming on the program and they mentioned you nailed u.s. real rates. can you walk us through what you expected to see? >> as the fed has ended qe, 10 year yield rates rose significantly. i don't get the sense productivity or labor force is picking up. far as what equilibrium real etsy economy can handle has not changed despite all of the positive data.

i think 10 year yield rates are going to be cap around 1%. every time we get close to that point i trade long. go long at one and take it off at 60 basis points. >> great to have you with us. get a market check on where treasuries have been this week. 2, 10, and 30. >> yields lower on the two yield. 10-year at 6, 30 year coming in at eight. the shape of the curve is flatter. still ahead, the final spread. featuring the mexican election and a payroll support. fireworks in the united states of america. this is bloomberg real yield. ♪

>> this is bloomberg real yield. it is time for the final spread.

mexico will be holding its presidential election of the weekend. it will be a shortened trading week in the united states next to an early holiday. markets close on wednesday. the u.s. jobs report of a fed minutes, and the scheduled start of u.s. tariffs on $34 billion worth of chinese goods. bob miller from blackrock and market caught up. it is good to have you with me. priya, we have been through 30 basis points on the spreads on treasury. the response i got was that we did. mid-1990's where we breached that level of 30 basis points. we came back and the cycle continued. are we in a mid-1990's type scenario or a late 1990's type scenario? look at the treasury curve we have in the backdrop? >> we are not seeing the pickup

and productivity. hike andd continues to goes about neutral, that curve is going to continue to flatten to zero and invert. the fed is saying we have to tighten but they are not changing that long-term rate. the other one will be global rates. it ended qe and was dovish. it will continue get to zero as the fed continues to-trouble growth does not surge. >> the level of rates in the mid 90's was higher than rates today. the front end is going to become most influenced by domestic purposes. long and term premium is very correlated. bojefforts of the ecb and to suppress real yields and keep the term structure low in those regions has a gravitational pull on the long end. the curve is going to stay flat,

flatter and longer than i thought. i am not sure the 30 basis point curve today send the same signal it sent in the late 90's. >> i think the majority of our viewers would agree. mark, does that resonate with you? give myself a great for calls for the year coming into january, this is probably an area where i give myself a be or be minus. we did not think the curve would flatten this way. we call the front end of the curve. i am sticking with the call. i am not sure we continue to flatten. i'm getting more concerned. as we think about the trade dynamic and what we are seeing from a global growth standpoint, this inability to decouple. you have to get worried about that.

long-term i believe we are normalizing across the board from a monetary policy standpoint. that means higher. we going to do a rapid fire round. keep it short. have we seen the high of the u.s. 10 year yield for 2018? >> yes. >> no. >> no. >> leveraged loans or u.s. year-end? into >> leverage loans. >> loans. >> loans. if there is not a presidential tweet are you going to be bearish on the payrolls report? >> no.

>> no. >> no. >> where is the fun with this? >> bob miller from blackrock and mark okada. >> we will see you next friday at 1:00. this was bloomberg real yield. this is bloomberg tv. >> ♪

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