♪ jonathan: live from jp morgan asset management, this is "bloomberg real yield." ♪ jonathan: coming up, stepping on the fed's independence. president trump pushing back against higher rates. chairman powell testifying that rate hikes will continue. for now. and meeting presidential resistance. the dollar rally and the u.s. struggling to find stability. we begin with a big issue, stepping on fed independence. >> ultimately it puts into question what the stature of the fed is, and fomc and their

ability to maneuver. >> the fed is not going to react from tweets from the president. they don't need to. >> it is a strong institution, and they have staying power. >> it is time to move rates back to normal. i think they will continue on that path.. >> if people start to feel the fed is going to kowtow to the president and allow the economy to grow too fast and inflation to go up, interest rates will rise. bond vigilantes will kick in and rates will rise, which is what the president does not want. or maybe the fed will say to show its independence, it will preemptively raise rates. either way, the president is shooting himself in the foot. jonathan: joining me now from jp michaelsset management, and lisa coleman, the head of global investment grade corporate credit. and lisa.

the federal reserve pushes back against higher interest rates. does it change anything? bob: it doesn't. the fact that you have tweets today and yesterday tells you how independent the fed is. it is a complex question. certainly, the president gets to appoint who they want as the fed chair, so they pick someone reasonable and moderate like jay powell. kind of what they are going to get. i think it was a good appointment. but he is on his own now. i think he has laid out a critical -- a credible path going forward. jonathan: it's safe to say that from the president's tweets, what is happening with the treasury curve? it has been flat and then all of a sudden we get steepness during the week. bob: there are a couple things going on. certainly there is a belief the fed will stick to the rate path that we will see increases every other meeting for now. i think also there has been news out of japan that the bank of

japan may tinker with its optimal yield curve control. so they may let the long end go a bit and be supported by market forces. jonathan: lisa, perception is everything. if it wasn't under a close watchful eye of the market, it will be more so for chairman powell. does his job get more difficult because of the president? lisa: i agree with all. -- with bob. i think the fed will continue on with its independence. chairman powell has a path, and that won't change as a result of the comments from the present. jonathan: we have gone back and forth. you think yields are going higher. you think yield could have a handle on the 10 year within 12 months. walk me through where we get from 10 year yield and treasury over the next 12 months. bob: 4% is only 100 basis points from here, and it is against the backdrop of the fed having raised rates for two and a half years, indicating they will go

for another year. that is a lot of upward pressure. does it look reasonable to buy treasuries with a sub 3% in 10-year? i don't think so. we have huge tax reform and just turning to work its way through the system. it is not fully into the system. you have a tremendous amount of treasury supply that will hit the market over the next 12 months. i step back and i think a good stopping point for the fed is june of next year, 2.75% to 3%. it will look like a good place to stop, but the economy will do great. jonathan: you mentioned that the issuance story. the bulk have been at the front end. the overwhelming consensus of everyone coming from the program is that the curve will flatten. it might even invert at the back end of this year. you are not only looking to 4%, but looking for steeper curve? bob: looking for a steeper curve. you are right, there has been a

lot of front end issuance. i think the treasury has made it clear that they are going to maintain a 70 month weighted average maturity on portfolio outstanding debt. if they are issuing on the front end, the back half has to come in the second half. curves have flatten before and have inverted and it has not led to recession, and they quickly re-steepen.-- 1994 to 1998 comes to mind. that was post the snl crisis and we had bond outstanding. the market continued to heat and the economy continued to heat up into the dot-com bubble. jonathan: in bob's world, sooner get 4% ini'm going to the treasury. why would i want to buy credit, lisa? lisa: because you have a good underlying economy going on. it depends on where in the credit market you are going to buy. let me give you some examples. if you look at triple b rated

credit, you might not want to spend risk budget there because this is an area where we have seen a lot of m&a issuance and companies have leverage themselves up. maybe what you want to look at is double b. double b credit this year has underperformed other parts of the high-yield market. economy, the good fundamentals look good and valuations are attractive. jonathan: don't they have incentive to run a triple b balance sheet? the yield pickup, going further up in quality. lisa: this is been the problem. if you look at the amount of m&a activity we have had this year, we are on pace for a record amount of acquisitions. companies have no incentive to run the balance sheet at single-a. that is why i like to double be part of the market. these are companies not making acquisitions. the fundamentals look good and you are getting paid a spread per unit of leverage more to take the companies than the

triple b rated companies where ceos are pouring on more debt to make acquisitions. bob: that is some of the disconnect in the market. you're talking about the 10-year should flatten and invert, number 3%. it is a mindset that people are used to 10 years of secular stagnation, investors and bond buyers. you hear corporate america has made the shift, preparing for a growing america again. not a stagnant america. they are going to take advantage of the growth and the stimulus. jonathan: the difference this time around, the two americas levering up. one is corporate america, and the other is the sovereign at the same time. it could be a toxic mix. bob: ultimately, it could end

bad. some of the angst coming out of the tweets, at a time following is going to go up why would you , want borrowing rate to go up? the other way to look at it is the opportunity is now. you still are at relatively low levels of interest rates. there is plentiful liquidity. you have structural reform through taxes. you make up deregulation. let's borrow and jumpstart the economy. jonathan: what does it say that we are having these conversations when the federal reserve is still considering monetary policy to be accommodative? the real rate is barely positive, and yet we are still having these conversation about risks and markets. what will we be talking about in 12 months? bob: i think we will say this is a good place for the fed to pause. there is some digestion going on. we will see what corporate

america does with the leverage it supplies, what it does with the repetitive if it of tax reform. we will have to look at what the bank of japan is doing. has the ecb raised rates? is the economy plowing through that like 1998? if it is, the market will make the best, that the fed has to go higher. lisa: i totally agree with bob. thinking back to your comments about the president talking about maybe the fed should not corporate, for america, they are not feeling the pinch of higher rates. it is in a way disconnected. the levels they are able to access remain attractive. jonathan: let's come full circle. do you think the president has a point? that the federal reserve should slowdown? bob: this is the most pro-growth administration anyone can remember since the reagan administration.

he wants ample liquidity and low-cost funding. he is going to argue for that. but it does tell you that he is focused on growth, growth, growth. jonathan: i have to put you on the spot. do you agree with him? bob: no, i don't. i think the fed is leaning into it for real. the last two and a half years, they have been trying to get to normal. we will see gdp print in the next couple of weeks with a four handle on it. and we have inflation, core at 2%. cpi is 2.9. that is above the 2% margin. jonathan: thank you to bob and lisa. great to catch up with you. coming up, we stay at jp morgan asset management and joining us will be diana amoa to talk emerging markets. that is coming up next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." we are live from j.p. morgan asset management. over to china, chinese markets ended the week on stronger footing. the you on reversing a -- the yuan reversing an earlier slump. central banks moved to weaken daily currency fixing, the most since 2016. joining me to discuss china and emerging markets is a diana amoa, senior portfolio manager involved with emerging markets debt at jpmorgan, and still with me is bob michele. and thoughts on china, whether you have a handle on what is happening with the pboc and what is happening in recent

months? diana: what the chinese are doing is the right response. what we have seen is they stepped back from the currency. they are willing to let the market determine where the trade -- the currency levels trade. they are willing to see where the market is pricing it. that is the right response, it could likely be a growth shock. for the pboc it is the right thing. today we saw announcements they will allow some banks to invest in loans again, and an easing of some regulations. they are trying to redirect liquidity. as far as china goes, the right response. jonathan: there are many ways to look at the chinese currency. you can look at it against the u.s. dollar in a vacuum, or in the basket. when you look at it, what story do you see? diana: i think versus the

dollar, the currency is trading roughly where we think fair value is. when you look at it in the basket, value has been depreciated. euroially when you look at and some asian currencies. that makes sense. the trade impact right now is going more toward asia. we expect a bit more weakness coming into the basket. i think the u.s. is a tough call. we just had bob and lisa discussing what the u.s. policy response is and the president pushing back. i think that is a harder call. from 2017 into 2018, do you worry about a slowdown in china? what it ultimately means for global growth? certainly if the tariffs escalated to a full-blown trade war, i would be concerned. typical q1said a

slowdown and we will see a real acceleration. when you look at what is going on in china and what the policymakers are doing, this is the frustration you are seeing in the administration in the u.s. they look at the terrace -- the tariffs and talk about levying and they see chinese policymakers making accommodation for that, relaxing policy. if you are the administration, you're looking at a central bank continuing to tighten rather than trying to accommodate the reverse tariffs. jonathan: for many it is a global story. global growth is dispersed. as someone managing em debt, are you looking at more on the regional basis because of the trade story? diana: exactly. we think the impact for tariff disproportionately heavy on asia. we are steering clear of the region until we get more clarity on where the trade tensions are going. we like latin america. a lot of value has been created.

plus, we are getting past the election cycle. we had columbia, and mexico had elections. brazil is getting closer to the point, but markets have premium. -- but markets have enough premium. jonathan: local dollar? diana: local, but very select. jonathan: china has had its problems. policy mistakes and central banks struggling to regain credibility. brazil as well. where you at at the moment? bob: i think there are a number of things. when i think about being a crossover investor in emerging markets, diana is right. i need a big bottle of and tested -- of antacid to get in and invest. but there are attractive things about latin america. currencies look oversold. the dollar is not going to go up forever. some models tell us it will flatten out. when you look at real yield, the u.s. is struggling to restore real yields to its government bond market. they are readily abundant across

latin america. if we get a bit of stabilization, we expect money to recycle back into the external and local markets. jonathan: the question for jpmorgan asset massive -- management, the very nature of this conversation talking regionally, not local securities. how important is it to be active in that space right now? diana: extremely important. the security selection or regional selection that you get with the latin money, you will have safety tightening and liquidity will have to be a factor. what we have seen in the past cycle, the passive managers have struggled managing some of the flows coming in and out of the sector, where active positioning allows you to manage liquidity. -- manage liquidity at her. at this point in the cycle, go to an active manager. jonathan: is that a pitch from

j.p. morgan today? diana amoa and bob michele, you are sticking with me. we are going to check on treasury through the week. closing out last week with a yield curve, but it was flat at about 25 basis point. today we steepen. a steeper curve, very slightly through the end of the week. next up, the final spread, the week ahead. featuring a decision from the ecb and mario draghi. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." we are live from jpmorgan asset management. it is time for the final spread. next week, a rate decision from the european central bank, and we have a g20 weekend meeting of finance ministers. another round of earnings including european banks and stantec -- fintech.

i am joined by bob michele. i want to go over your for conviction traits. do you believe the federal reserve will raise former times and then close? bob: absolutely. that brings the fed fund rate to 2.75% to 3% depending where inflation is. that is a real yield of about 0.5% to 1%. that is still generous by historic fed terms, but not overly accommodative. they will have raised rates for 3.5 years. why not step back and see what other central banks are doing and also see how the economy is doing a year on? jonathan: that takes me to the second conviction call, duration. bob: we are bearish. as the fed raises rates and supply hits the market and quantitative easing switches to

quantitative tightening yields , will drift higher across the curve. we want to hide in the front end of the curve. short securitized for example. jonathan: do you see that more pronounced in europe or in the united states? bob: i think more in the u.s., frankly. i think people will have to adjust to what the curve looks like in a growing america. the fed, itwill see is a new fed, get its feet under itself. the market will have to interpret that a year from now. jonathan: that takes us to the spread between europe and the united states. u.s. high-yield and european high-yield, will they narrow and spread in the coming year, and from which direction and why? bob: both look great. if we look at u.s. high-yield, it has traded in a range of 330 to 380 since february. we are in the middle of that range. as lisa pointed out, there is a tremendous tailwind coming to corporate earnings and that will be reflected in better credit

quality, and the cycle u.s. high-yield tends to go to 300 over. i think there is at least 50 to 60 basis points of tightening. we have european high-yield at a 4% handle. but europe looks good. you have an accommodative central bank, you have them buying investment-grade corporate spirit -- corporates. that will spill over to the european high-yield market. we expect 3%. jonathan: should we get to the elephant in the building? your boss on a higher floor, talked about companies this week in european high-yield. what is the thinking? bob: it is a reflection of looking at european central banks and trying to understand why they continue to print money and invest in corporate debt. they don't need to do that, and you want to be careful not to entrench bad practices in corporate behavior across europe. i think it is a valid warning,

and i think the ecb will be sensitive to that. our expectation is at next week's meeting, you will hear more clarity on what the plan for normalization looks like. by the way, they cannot be happy with their last meeting, when they talk about not raising rates until the end of next summer, and then seeing a rally. is that a soft call? bob: it is 3.5% to 4%. but i take your point. i like the 4% call. corporate america is growing again, we are not in a time of secular stagnation. the fed is scrambling despite the administration to get something that looks normal. credit is readily available, and you are seeing companies in the early stages of accessing at. -- accessing it. wait until we see what goes looks like a year from now.

typically, i get a list of thought from my guest. i got a list of thoughts from my guest and the fifth call was nothing to do with markets. it just said, support liverpool and nothing else. bob: we are ready. we have the brazilian keeper. jonathan: you have more conviction about that than the treasury market. bob: equal conviction. jonathan: bob michele, j.p. morgan, thank you very much. bob: thank you. jonathan: our thanks to bob. from new york, that does it for us and we will see you next week. from new york, this was "bloomberg real yield." this is bloomberg tv. ♪ two, down and back up.

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bloomberg daybreak: middle east." turkey's troubles deepen. credit rating, cut farther. lira plunges to new lows. signs of an aid package on the way for arraignment. a bond rally fizzles as investor anxiety returns. year to date drop, is now the time to buy the bon d? ♪ markets began digesting