jonathan: this is 30 minutes dedicated to fixed income. this is bloomberg real yield. ♪ u.s. gdp sees the fastest growth since 2014 and the president says more to come. the judge used of the junk continues to outperform. looking ahead, central bank decisions, the boj and said, coming appeared -- coming up. we begin with the big issue, is this as good as it gets? >> this is really about shifting

the growth debate away from the low for longer, new normal. >> the tax cuts had a big effect on the second quarter. >> everybody has this growth over the next two years. >> a gives us information, but i am not sure it is going to fuel a level of exuberance that is not supported by the fundamentals. third quarter, fourth quarter, you're talking a global turbulence. >> the economy keeps moving along. >> maybe we are seeing signs you could have sustainably higher, not necessarily for five, but going back to two. jonathan: joining me around the table are my guests. plus, our guests in houston. a basic question.

is this as good as it gets or growth?et more the think will be close to 3% growth we've been striving to have on an annual basis, but the i don't anticipate is going higher on the quarterly number from here. there are some bonds that will be one-time charges, exports were higher than you would normally expect. there are some things we could back off a little bit but on a trend basis, we are higher than previously. i think were seeing a continuing trend. a slightly to do with fiscal stimulus it a think as the fed

continues to raise rates, you will see this come out and you -- toward a neutral rate, you will look again at the stable growth rate. the president is setting things up to blame the federal reserve. ,> i think the federal reserve it is independent, it has an inflation target. i think inflation is around where it needs to be. the labor market is incredibly tight. i think the fed and chairman powell have laid out a steady path. it is hard to see him moving away from that trajectory of rate rising. maybe there is the argument that the labor market is not incredibly tight. maybe they will have to slay

down to see the results of their efforts come through. heady see the tension between the fed and the administration playing out at the back end of the year? >> they're not the first of ministration to blame the fed and the pushback on the fed. it is normal politics to me. the fed has a job to do, and they are going to do it. jonathan: the consensus view from everyone i have talked to is we are going to have a fantastic q2, and things will get worse through 2019 and 2020. that just makes sense. does it make sense to you in the treasury market? >> the flacco is already priced in. i think the risk of inflation coming. of the market is basically pricing in front and no inflation forever, and i

would take the other side of forever. >> in a sense, when you look at the inflation numbers, look at the food numbers. they are negative year-over-year. that will flow through the cpi at some point. it is even more than energy. i anticipate we will see inflation numbers come down on a headline basis. the vacancy rates have hit, where we have hit after the hurricanes, we have seen that turnaround and bring back some of the inflation number. the fed i don't think will be in a rush to raise rates, but i -- raisey have a rates. say theytly, we still are long on the front and the value of the curve.

we actually think you will start to see some steepening of the curve in the long end of the curve. i think particularly when you look at the bank of japan, we expect to see steepening on this comes as well. that will see through into the u.s. treasury curve. we do expect to see a steepening eventually. will the steepening be policy driven or economic fundamentals? will the catalyst be a bank of japan move to change the yield curve control he have had for quite a while now? >> that is right. we have seen a slight move. we know they want this to

steepen. i think based on the fundamentals, economic growth is relatively stable. inflation is still lackluster. ,hey need to see possibility pension funds, life insurance, we need to see a steeper curve. think it's a combination of all of these, but not necessarily based on an inflation target mandate but based on growth and the possibility of requirements for banks. jonathan: the property objectives of the bank of japan where clearly portfolio mechanisms, they wanted pension funds. if you changed the yield curve controls, if you allowed yield to the long and start rising, are they going to start buying jcb's again? >> it will take more than a minor change to get that to happen. jonathan: what is your base case next week? >> they're going to say they are

moving toward removing the yield curve control, and i don't think they necessarily are going to give a big number. jonathan: this is play into the overall cutie picture -- overall q3 picture? now weboj was lagging, are falling into place. that basically makes the place for rates to be rising a little bit all around the world. jonathan: victoria, let's talk about a spread, it has widened through much of this week. when q3 comes through, when we could see the spread to tighten, do you expect it? >> i think it will. quantitative tightening issue, i think we will see a globally in the next 12 months. look at the balance sheets. the fed is reducing their balance sheet, the doe ending their buying program.

we spoke about bank of japan. the pboc is really the only one that has quite a bit of expansion going on with the balance sheet. but that will moderate as well. at next 12 months, you look this group of central banks, and i think you have quantitative tightening going toward the end of 2019, and that will make the spread come lower. i was to speaking to some clients this past week, and we had a chart that showed a 10 year u.s. against all the other tenure sovereigns, and there is a huge gap, except for italy with the election spikes, but otherwise a huge gap that is holding our long and down and i think that will have to narrow with quantitative tightening. >> i think expectations are so ,ow at the moment at the ecb very little is priced in. see a little will more, i think the bar is so low

that they could use some more forward guidance from the ecb. --sing a little adjustment we are seeing a little adjustment on the balance sheet, but also unknown. i think we could see some more forward guidance. are staying guests with me. coming up, the auction block. junk bonds continuing to outperform. that is up next. this is bloomberg real yield. ♪

♪ bloomberg realis yield it is time for the auction

block, i want to get to the treasury market, it issued $119 billion in debt through this week. first up, we focus on the $36 billion sale of five-year notes, the highest ratio since may of 2017. investors quickly moving past additional u.s. sanctions. is three times oversubscribed. lose thecontinues to junk-bond market, high yield is 20% lower than the same time last year, and the lowest since 2009. my guests.discuss is victoria, i want your view. what is really supporting triple see, the junkie is to of junk? >> you also see strong earnings 1%---on, you are earning

20%-plus in earnings right now. also, the spread between high-yield and investment grade has stayed consistent. that's one of the canaries in the coal mine we watch. we have not seen issues in the corporate sector yet. this is investment grade and high-yield. isathan: morgan stanley saying some investors argue the , our answer isg the credit market is forward looking. overall, we are relatively cautious toward high-yield at the moment. supply, it is down to moresupply elsewhere, and

-- and a lack of supply and high-yield could -- high-yield. high-yield versus emerging markets issuance. action have a presence for those rather than high-yield. there is it's curious a bearish argument for u.s. high-yield, and argument that growth rolls over next year and corporate earnings start to disappoint. we just delivered gdp growth, is this strange to you? >> i think all the markets are forward-looking. i think when you look at growth potential, it's going to be strong, but the fed continuing to hike rates, that has to be affect you take into account. jonathan: what about the outperform as we have seen relative to the high-yield story? >> the triple seaside, they are side, theriple c bad guys have falling does have

fallen out. that makes the index look better than it is. then you have the move to leverage loans. the issue is huge. there is still the junk debt out there. you have to bring those things in a place little bit. that being said, we have played the front end of the high-yield curve, and it is interesting triple b,e b to .hat's where the supply is jonathan: you bring up loans. people higher up in the capital structure are rushing into leverage loans. what you think about that? >> if they were from five years ago, that would be a wonderful place to rush into, but right now, the market is rushing , and, -- rushing there

they don't have to put the covenants in there, and it's not going to be as good as in the past. jonathan: to what extent are liquidityright now -- when it could be needed for yields to pick up? >> they are searching for the yield, we seen at the last couple of years, the yield curve as low as it is come other trying to find the best place to do it and they are willing to take the chance. comes fromot of it the fact that volatility was so low last year, they thought they could do that without repercussions. we focus a lot more on doing higher quality, low liquidity in our portfolios if you don't want that risk, but many investors need the yield and cash flow and they are looking for wherever they can find it. we are focused on liquidity. i do think is important to understand, you start to see volatility spike. seeingmportant we are

emerging markets, as well. it's important to understand volatility component when you're looking at the risk profile. jonathan: is this a late cycle fear? i feel like we've been talking about late cycle for years and years, that when we started we were not actually in late cycle. how does -- how do you have confidence that is where we are? >> i think there are a number of factors in play. forcing a slowdown of growth in china, we are seeing the bank of japan, ecb solving some monetary policy. there are some idiosyncratic events around the world. market pressure. the potential threat on tariffs and trade worse. -- trade wars. there are some new risks, not just the cycle, but idiosyncratic risks. jonathan: also the question of

how effectively the market discounts risk. that's been a big problem. companies filing for bankruptcy. look at what happened to facebook this week as well. -- is therket is market aware of risk as well as they should be? >> when things move, they move that six-figure deviations instead of two. a lacksically points to of liquidity in the market that used to be there in terms of buffers. how you play that, that the more interesting element, the after markets have a big skew and the tail is set, but that's where we are. jonathan: you are going to be sticking with me. want to get a market check

number bonds have been this week. treasuries, two to 10 and 30's, shaking up. yields of about eight basis points. at the long end, up about 6.3%. still ahead, the final spread, a big week of bank decisions caps off -- caps off with payroll.

♪ jonathan: this is bloomberg real yield. time for the final spread. the next week, a central-bank extravaganza come on tuesday, rate decision from the boj. wednesday, the federal reserve making a decision on monetary policy. thursday, the bank of england. u.s. payroll data for july. my guests are still with me. we have you over from london, let's make the most of it. we going to get a hike from the bank of england? >> it is pretty much priced in by the market anyway. i think we will see a hike. we look at inflation, it is still above target. economic data, growth. we think it is stabilizing quarter on quarter.

the labor market is still pretty tight in the u.k.. i think we saw a shift in that direction with the last decision, a 6-3 vote. i think we could see it. jonathan: the bank of england has been criticized many times, and some people think justifiably about interest rate hikes. have a munich it does better -- have a communicated this better? >> i think they've done the best they can. they are in a difficult box with brexit and u.k. economy and politics. they are in a difficult spot. i know been criticized in terms of communication, i think as much as they can do, they are being pretty on message. jonathan: quite educated people are presenting the idea that you hike now see you can cutlet appeared is that what -- so you can cut later.

is that with the bank of england is thinking here? is theyf the messages will be watching the politics unwind here, so this might be it for a while. jonathan: why hike into messy politics? , ifecause inflation numbers you are doing your job, you should be looking at that and hiking. and therepen economy, is a lot be said in terms of brexit, not only hurting manufacturing but in how the crisis follow-through. >> think that's right. expecting the one hike. i think the economic data inflation does warrant a rate rise. think they have their mandate and a job to do and they will push through. jonathan: payroll is coming up next week.

a federal reserve decision and bank of japan, a lot next week. from new york, this was real yield. ♪

you said: you are watching the best of bloomberg daybreak middle east. price pressures are easing in saudi arabia. is it enough to revive consumer confidence? we speak to some of the top ceos in the region to discuss the numbers. looks to wall street, lining up some of the biggest banks to raise the money . markets rose as donald trumps