jonathan: from new york city for our viewers, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: u.s. gdp sees the fastest growth since 2014 and the president says more to come. the junk debt continues to outperform scarcity. make central to bank decisions. the boj and fed coming up. we begin with the big issue, is this as good as it gets? >> maybe this is the one time as good as it gets q2 record high

prints. this is really about shifting the growth debate away from the low for longer, new normal. >> you have 18 months left. >> the tax cuts had a big effect on the second quarter. >> everybody has this growth fading over the next two years. back down to the long-term sustainable 2%. >> while it is information -- while it is interesting and gives us information, but i am not sure it is going to fuel a level of exuberance that is not really supported by the fundamentals. >> third quarter in fourth quarter, you are talking a global turbulence. >> the market is starting to anticipate some of those factors. >> the economy keeps moving along. >> maybe we are seeing signs you could have sustainably higher, not necessarily for five, but also not going back to two. jonathan: joining me around the table are my guests. plus coming to us from houston is the chief market strategist. vittorio, let's begin with you and ask a very basic question. is this as good as it gets or

can we break out to more of a growth that we have seen in years gone by? >> i think our trend growth will be higher. i think we will because her to the 3% growth we've been striving to have on an annual basis, but having the 4.1% print today, i don't anticipate is -- is going higher on the quarterly number from here. there are talks that it is a sustainable number, and to an extent, consumer spending was high, and that was good. there are some bombs that will be one-time charges. bonds were higher than what you would expect because of increase in exports. there are some things maybe we will back off a little bit, but on a trend basis, we are higher than previously. jonathan: to what extent can this be sustained? >> i think were seeing a continuing trend. we see being brought forward, fiscal to do with the stimulus we have had. i think as the fed continues to raise rates, you are going to

see this come down and you will start to get some equilibrium. it is still a very -- still very accommodative and as you get toward a neutral rate, you will look again at the stable growth rate. jonathan: you just pointed to the point of tension because the at the back end of this year, the president is setting things up to blame the federal reserve. >> i think the federal reserve, has its job. it is independent, it has an inflation target. i think inflation is around where it needs to be. the growth rate is very strong. the labor market is incredibly tight. i think the fed and chairman powell have certainly laid out a steady path of rate rises. it is going to be hard to see him moving away from that trajectory of rate rising. jonathan: the administration might make the argument that the labor market is not incredibly tight. they might make the argument that they need to slow down to

see the results of their efforts come through. how do you 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 to push back on the fed. it is normal politics to me. as marilyn said, the fed has a job to do, and they are going to do it. jonathan: the consensus view from everyone i have talked to throughout the week and the last several months is we are going to have a fantastic q2, and things will get worse through 2019 and 2020. the fed will carry on hiking through next year as well. the flattening makes sense. does that still make sense to you in the treasury market? >> it is already priced in. it is a flat curve out a few years, so it is there. of inflationisk coming, there could be a surprise. i like the idea of the fact that the market is basically pricing in flat and no inflation forever, and i would take the other side of forever.

jonathan: would you take the other side of forever, victoria? >> in a sense, yes. when you look at the inflation numbers, look at the food numbers. they are negative year-over-year. that will slow through -- that will flow through to cpi at some point. it is even more than energy. i anticipate we will see inflation numbers come down on a headline basis. you have seen on the shelter component for inflation the vacancy rates have hit where they are going to 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 think they have a mandate if they choose to with the strong growth numbers we received. jonathan: i note the house view at black rock is more nuanced. just walk us through it quickly. >> currently, we still favor and theng the front value of the curve.

we actually think you will start to see some steepening of the curve. held down has been and it is hard to see when that will decline a little bit. but i think particularly when you look at the bank of japan, we expect to see steepening on those curves as well, and that will feed through to the u.s. treasury curve. we do expect to see supply coming into the market. we do expect to see a steepening eventually. and we are just not taking the risk. jonathan: will the steepening be policy driven or economic fundamentals? i want to say policy driven. we are looking ahead to a boj decision next week. will the catalyst be a bank of japan move to change the yield curve control they have had as a policy control for quite a while now? >> that is right. we have seen a slight move. we know they want this to start to steepen. i think based on the

fundamentals, economic growth is relatively stable. inflation is still lackluster. but they need to see profitability, they need to see the banks, the hedge funds, life insurers, we need to see a steeper curve. think it's a combination of all of the above, not necessarily based on an inflation target mandate but based on growth and the profitability requirement for banks. jonathan: that is what i'm thinking about. the policy objectives of the bank of japan where clearly portfolio mechanisms, they wanted pension funds. they wanted investors to take more risk, to get out. if you changed the yield curve controls, if you allowed yield s to the long end to start rising, are people going to buy jcb's again? >> it will take more than a minor change to get that to happen. what we could expect them to do would be minor adjustments. 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. that is going to scare anyone. jonathan: does this play into the overall q3 picture? >> i think it does. at the end of the day, we had the fed, and the boj was lagging, now we are falling into place. that basically makes the place -- makes the case for rates to be rising a little bit all around the world. jonathan: victoria, let's talk a spread -- talk about a spread that has been superwide, bunts versus treasuries. duty comes through and when we could see that spread start to tighten a little bit, do you expect that spread to tighten? >> i think it will tighten. this whole quantitative tightening issue, we will see it globally throughout the next 12 months. look at the balance sheets you have. the fed is reducing their balance sheet, when you look at boe ending their buying program. i would expect their buying sheet -- balance sheet to contract next year.

the bank of japan, we see it there. the pboc is really the only one that has quite a bit of expansion going on with the balance sheet. but that should moderate as well. over the next 12 months, you look at 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 actually just speaking to some clients this past week, and we had a chart that showed a 10 year u.s. against all the other 10 year sovereigns, and there is a huge gap, except for italy that had its spike with elections, but otherwise there is a huge gap that is holding our long end down and i think that will have to narrow with quantitative tightening. jonathan: is that your argument too, marilyn? >> i think expectations are so low at the moment at the ecb, very little is priced in. i do think we will start to see that play through a little more. i think the bar is so low that

if we do see more fired guidance from the ecb and you start to see a little more of an investment from the ecb -- we still have to hear about their reinvestment policy, but we could start to see those spread and narrow. -- we could see more forward guidance. jonathan: my guests are staying with me. coming up on the program, the auction block. junk bonds continuing to outperform. that is up next. this is bloomberg real yield. ♪ ♪

jonathan: i'm jonathan ferro, this is "bloomberg real yield." it is time for the auction

block. i want to begin with the treasury market, which issued $119 billion in debt through this week. first up, we focus on the $36 billion sale of five-year notes, which drew the highest bid to cover ratio since may of 2017. in russia, investors quickly moving past the threat of additional u.s. sanctions. the bulk of the notes is more than three times oversubscribed. in the u.s., supply continues to elude the junk-bond market for the second straight week. high yield is 20% lower than the same period last year, and the lowest since 2009. with me to discuss is my guests. victoria.lyn, jack, victoria, i want your view. what is really supporting triple the junkiest of junk? >> you also see strong earnings going on. you are in 20%-plus in earnings right now.

the combination of the two helps to keep that low, the other thing we are watching in regards to high-yield is the spread between high yield an investment grade. that has stayed pretty consistent as well. that's one of the canaries in the coal mine we watch to see if we will see changes in the corporate sector. we have not seen that either. it is strong in both investment grade and high-yield. jonathan: morgan stanley is saying some investors argue the growth is strong. and defaults are low. our answer is the credit market are forward looking. i want your view on the bearish market coming from morgan stanley. i think overall in a globally diversified portfolio, we are relatively cautious toward high-yield at the moment. it has not outperformed eiji's this year. a lot of it is down to supply, more supply in ig and less supply in high-yield. it, marketok at

versus subordinated debt of european ig issuers, we have a presence -- a preference for those rather than high-yield. jonathan: it's curious there is a bearish argument for u.s. high-yield, and argument that growth rolls over next year and corporate earnings start to disappoint. we are having that conversation in a quarter where we delivered gdp growth. is that strange to you, marilyn? >> i think all the markets are forward-looking. i think when you look at growth potentially, it is going to be strong, but the fed continuing to hike rates, that has to be a factor that you take into account. jonathan: what about the outperformance we have seen relative to that from the high-yield story? >> there are a couple technical aspects of this. on the triple c side, you recognize a lot of names are falling out, the really bad guys have fallen out last year.

that makes the index performance look a little bit better than it really is. then you have the move to leverage loans. the issuance in leverage loans is huge. not just this year, but the year before, 2017. that junk debt out there. you have to bring those things into place a little bit. that being said, we have been playing the front end of the high-yield curve, and it is interesting to say that double b to triple b, that's where the has exploded. that is the area where all the supply is, and every company feels they have to work as triple b's and they don't need to be single a's anymore. jonathan: you bring up loans. people go up in a higher capital structure. what you think about that? >> if they were from five years ago, that would be a wonderful place to rush into, but right now, because the market is rushing there, issuers do not have to put the covenants in

there, and now it is like it will not be as good as in the past in terms of recovery rates. jonathan: which begs the question, to what extent are investors pricing liquidity when it could be needed for yield pickup? >> they are absolutely doing that. they are searching for that yield. we have seen at the last couple of years, when the layered -- curve is a as low as it is, they are looking for the best place to do that. they are willing to take the chance. i think a lot of it comes from the fact that volatility was so low last year, they thought they could do that without any kind of repercussions. we focus a lot more on doing more higher quality, low liquidity in our portfolios if because we don't want to take that risk. but many investors need the yield and cash flow and they are looking for wherever they can find it. jonathan: your focus, too? >> we are focused on liquidity certainly, and i do think it is important to understand that you do start to see volatility spike. we saw it in italy and the markets.

important we are seeing it in the emerging markets as well. it is important to understand a no volatility component when you're looking at the risk profile. jonathan: is this a late cycle fear? i know people have a problem with that concept, because i feel like we've been talking about late cycle for years and years. when we started, we were not actually in late cycle. how do you have confidence that is where we are? >> i think it has to do with potentially coming to the late cycle, but there are a number of factors at play. slowdown of growth in china, we are seeing the bank of , ecb solving some monetary policy. there are some idiosyncratic events around the world. market pressure. the potential threat on tariffs and trade wars. there are so many different risks out there, not just the cycle, but individual idiosyncratic risks. but i think they do post risk to investors that are not really aware of their investment.

jonathan: also the question of how effectively the market discounts risk. that's been a big problem. you look at toys "r" us filing for bankruptcy. you will be fairly familiar with happened with facebook this week as well. is this market discounting risk as effectively as it once did, if it ever did? >> you touched upon a few great examples, but they are in the broader peace, which is that when things move, they move at six standard deviations as opposed to two. that points toward the lack of liquidity in the market that used to be there in terms of buffers. how do you play that is a little more interesting element, a lot of the option markets have a big skew, but that is the world we are in. when it is there, it is humongous. jonathan: jack will be sticking with me, along maryland watson -- along with marilyn watson and victoria.

i 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 wake of central bank decisions cap off with a payrolls report. august just around the corner. this is "bloomberg real yield." ♪

♪ i'm jonathan ferro, this is "bloomberg real yield." it is time for the final spread. coming up over the next week it is a central-bank extravaganza beginning on tuesday when we get a rate decision from the boj. wednesday, the federal reserve making its decision on monetary policy. on friday, u.s. payroll data for the month of july. who saw august coming? with me are my guests. marilyn, we have you from london so let's make the most of it. will we get a hike from the bank of england? >> it is pretty much priced in by the market anyway. i do think we will see a hike. i think when you look at inflation, it is still above target. actually economic data, growth. ,we think is stabilizing quarter on quarter. the labor market is still pretty tight in the u.k.

i think we saw the shift in that direction with the last decision, where we saw a 6-3 vote. i think we could see it. jonathan: the bank of england has been criticized many times, and in many people's opinions, quite justifiably about the communication of interest rate hikes. have they communicated this better? one >> i think they've done the best they can. in a veryf england is difficult spot with brexit and a whole range of different problems happening in the u.k. economy and also the politics as well, and the impact the politics is having on the economy. they are in a difficult spot. i know been criticized in terms of communication, but i think as much as they can do, they are -- they have been pretty on message. jonathan: quite educated people have the idea that you can hike now so you can cut later. is that with the bank of england

is thinking here, that they need some capacity, some space? >> i think they do. one of the messages is they will be watching the politics unwind here, so this might be it for a while. jonathan: why hike into messy politics? >> because some of the inflation numbers, if you are doing your job, you should be looking at that and you should be hiking. it is an open economy, and there is a lot be said in terms of brexit not only hurting some of the manufacturing, but in terms of how the prices follow through. >> think that's right. i think were expecting the one hike. now we have the second to keep hiking like the fed is. i think the economic data inflation definitely does warrant a rate rise. their policy is incredibly accommodative as well. i think they have their mandate and a job to do and they will push through. jonathan: that is the bank of england story.

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

ali big earnings come a cash, big buybacks. 's catchword triggers shareholder returns. u.s. independence on deck. lng soybeans to the rescue. it's getting hot, hot, hot. the drop in texas dismissed crops and california power crisis pop. ♪ alix: i'm alix steel and welcome to "commodities edge."