jonathan: from new york city for our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, u.s. gdp -- the fastest growth since 2014 and the president says there's more to come. the junkiest of junk debt continues to outperform supply scarcity, supporting high yield. and looking ahead to a big week of central bank decisions, the boj and fed coming up. we begin with a big issue, is this as good as it gets? >> maybe this is the one time as good as it gets q2 record high print. >> this is really about shifting the growth debate away from that

low for longer, new normal. >> you've got at least 18 months, maybe 2 years 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 that long-term sustainable below 2%. >> while this one print is interesting and it does give us information, i am not sure it is going to fuel a level of exuberance that is not really supported by the fundamentals. >> third quarter and fourth quarter, you are talking about global turbulence. >> the market is starting to anticipate some of those factors. >> the economy keeps moving along. >> maybe we are seeing signs here that you could have sustainably higher, not necessarily four or five, but also not going back to two. jonathan: joining me around the table here in new york is marilyn watson, global head of fundamental bond strategy at blackrock, jack flaherty, investment director at gam's fixed income team, plus, coming to us from houston is victoria fernandez, chief market strategist at crossmark global investments. victoria, let's begin with you and ask the very basic question, whether this is as good as it gets or whether we can we break out to a higher-trend growth

then we have seen relative to years gone by? victoria: i think our trend growth will be higher, absolutely. i think we will be closer to that 3% growth we've been striving to have on an annual basis, but having the 4.1% print today, i don't anticipate is going higher on the quarterly number from here. i know there is a lot of talk that it is a sustainable number, to an extent they are seeing some things that are sustainable. consumer spending was high, and that was good. but there are some bombs that will be one-time charges. the exports were higher than what you would normally because of the 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? marilyn: i think we are seeing a continuing trend we have seen this year, where we see capex being brought forward, largely to do with the fiscal stimulus we have had. i think as the fed continues to raise rates, you are going to

see this growth rate come down and you will start to get some more equilibrium. rates are still very accommodative. as you get towards the more neutral rate, i think you will really look again at where the stable growth rate is. 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 if growth rolls over. marilyn: well, i think the federal reserve has its job. independent, it has its growth target, unemployment rate inflation target. , i think inflation is around where it needs to be. the growth rate is very strong. the labor market is incredibly tight and so i think the fed and chairman powell have certainly laid out a very, very steady path of rate rises. and i think from all the speeches he has said, it will be hard to see him moving away from that trajectory of rate rising. jonathan: jack, the administration might make the argument that the labor market is not incredibly tight because they don't have the wage growth yet. they might make the argument that the fed needs to slow down to actually see the results of their efforts come through and not to kit it off too early.

how do you see that tension between the fed and this administration playing out in the back end of this year? jack: well, they're not the first administration to blame the fed and to push back on the fed, so this is kind of normal politics to me. as marilyn said, the fed has a job to do, and they are going to do it. jonathan: literally the consensus view from everyone i have spoken to, jack, throughout the week and the last several months is we are going to have a fantastic q2, things will roll over, q3, q4, and things will get worse through 2019, 2020. the fed will carry on hiking through next year as well. the flattener just makes sense. does that still make sense to you in the treasury market? jack: well, if you look at the forward spots, it is already priced in. it is a flat curve all the way out a few years, so it is there. as a matter of fact, though, i think the risk of inflation 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 like to take the

other side of forever. jonathan: would you take the other side of forever, victoria? victoria: well, in a sense, yes. when you look at the inflation numbers -- look at the food numbers. ppi numbers are now negative year-over-year. that will flow through to cpi at because food is about 13% of cpi, even more than energy is. so we actually anticipate we will see inflation numbers come down on a headline basis. you have actually seen on the shelter component for inflation the vacancy rates have hit where they are going to hit after the hurricanes. so you are starting to see that turnaround a little as well and should 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: and marilyn, i know the house you in but -- house blackrock is more nuanced. just walk us through it quickly. marilyn: currently, we still

favor being long the front in the value of the curve. we actually think you will start to see some steepening of the curve. i think it has been held down and it is hard to see when that will decline a little bit. but i think particularly when you look at the ecb, 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. thee do expect, also with increased supply coming through as well into the market, we do expect to see a steepening eventually. you are just not paid to take the risk of being longer. jonathan: will the steepening be policy driven or economic fundamentals? when i say policy driven, we looking ahead to a boj decision -- 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? marilyn: that is right. they have had this control for quite some time. we have seen a slight move on the tenure part of the curve. we know they want this to start to steepen.

we are positioned to stephen as well, and -- stephen as well -- steepen as well, but 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, they need to see a steeper curve. i 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: jack, that is what i am thinking about. the policy objectives of the bank of japan were clearly through the portfolio mechanisms, they wanted pension funds and investors to take more risk, to get out of jcb. if you changed the yield curve controls, if you allowed yields to the long end to start rising, are people going to start buying it will takejack: 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? jack: 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 qt picture? jack: i think it does. at the end of the day, we had the fed, the ecb, and the boj was lacking. now we are falling into place. that basically makes the case for rates to be rising a little bit all around the world. jonathan: victoria, let's talk about a spread that has been super, super wide, bunds versus treasuries. it has widened through much of this week as well. i'm wondering when qt starts to come through, when we could see that spread start to tighten a little bit. do you expect that spread to tighten? victoria: 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. obviously, the fed is reducing their balance sheet. we look at the boe, they are ending their bond buying program.

i would expect their balance sheet to contract next year. and we just spoke about 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 their balance sheet, but that should moderate as well. over the next 12 months, you look at this whole 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 at a conference this past week, and we had a the 10 yeart showed 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 is going to have to narrow as quantitative tightening becomes part of everyone's plan. jonathan: is that your argument too, marilyn? marilyn: i think expectations are so low at the moment at the ecb, very little is priced in. so i do think we will start to see that play through a little more. i think expectations are so low, the bar is so low that if we do

see more forward guidance from the ecb and you start to see a little more of them adjustment -- of an adjustment from the ecb -- we still have to hear about their reinvestment policy, but we could see more forward guidance from the ecb as well. jonathan: my guests are staying with me. marilyn watson from blackrock, jack clarity from gam, and victoria fernandez. 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, where 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. over in russia, investors quickly moving past the threat of additional u.s. sanctions. sold all ofministry the 35 billion rubles of debt in the auction of domestic securities, with the bulk of the notes more than three times oversubscribed. in the u.s., supply continues to elude the junk-bond market for the second straight week. high-yield bond issuance so far this year is 20% lower than the same period last year, and the lowest since 2009. with me to discuss is marilyn watson from blackrock, jack from gam, and victoria fernandez. victoria, i want your view. what is really supporting triple c's, the junkiest of junk? victoria: the supply story is there, but you also see strong earnings going on. we 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 -- and 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 start seeing changes in the corporate sector. we have not seen that either. so it is strong in both investment grade and high-yield. want to get across to the morgan stanley view of things, recommending to avoid triple c's. also saying some investors argue the growth is strong and defaults are low. our answer is the credit market are forward looking. marilyn, i want your view on the bearish opinion from adam richmond at morgan stanley. marilyn: i think overall in a globally diversified portfolio, we are relatively cautious toward high-yield at the moment. it has not outperformed ig's this year. a lot of it is down to supply, more supply in ig and lack of supply in high-yield. when you look at it, market

versusging market subordinated debt of european ig issuers, we actually have a preference for those rather than high-yield. jonathan: it's curious there is a big bearish argument for u.s. high-yield, and argument that -- an argument that growth rolls over next year and corporate earnings start to disappoint. we are having that conversation in the quarter where we have just delivered gdp growth at 4.1%. is that strange to you, marilyn? 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 as rates increase, and that has to be a factor that you take into account. jonathan: jack, what is your view on the underperformance we have seen on ig and the outperformance we have seen relative to that from the high-yield story? jack: 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 actually had the move to leverage loans. the issuance in leverage loans is huge. not just this year, but the year before, 2017. so there is still that junk debt out there, ok? so 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 also to say that double b's to triple b's, that's where the supply 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: what do you make in the flow in rates story? you bring up loans. people go up in a higher capital structure. what you think about that? jack: it would be interesting, because if they were leverage loans from five years ago with great governance, 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 oh my goodness, 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 right now sacrificing liquidity when it could be needed for yield pickup? victoria: no, they are absolutely doing that. they are searching for that yield. we have seen at the last couple of years, when the curve is as low as it is, they are looking for the best place to do that. and 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 -- we focus a lot 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? marilyn: two victoria's point as focused one liquidity certainly, and i do think it is important to understand that you do start to see volatility potentially spike. we saw it in italy and we have

seen it in other markets. we have also seen 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. so clearly, when we started, we were not actually in late cycle. how do you have confidence that is where we are? marilyn: i think it has to do with potentially coming to the late cycle, but i think also there are a number of factors at play. so we are seeing a slowdown of growth in china, we are seeing the bank of japan, ecb solving moving away from loose monetary policy. there are some idiosyncratic events around the world, certainly in emerging markets, etc. we have the potential threat of tariffs and trade wars. so i think there are so many different risks out there, not just the cycle, but individual idiosyncratic risks. i think they do pose risks to investors who are not really aware of their investment. jonathan: also the question of

how effectively the market actually discounts risk. that has been a big, 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? jack: you touched upon a few great examples, but they are in -- but there is a broader piece, which is when things move, they move at six standard deviations as opposed to two. so that actually points towards the lack of liquidity in the market that used to be there in terms of buffers. --, how'd do you played at now, how do you play that is a little more interesting element, a lot of the option markets have a big skew in the tales are really fat, but that is the world we are in. volatility is there, it is humongous. jonathan: jack flaherty will be sticking with me, along with marilyn watson and victoria fernandez.

i want to get a market check number bonds have been this week. treasuries, to's 10, and 30 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 central bank decisions capped off by a payrolls report. august just around the corner. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro, this is "bloomberg real yield." it is time now 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 bank of japan. wednesday, the federal reserve making its decision on monetary policy. thursday, it is the bank of england's turn. on friday, job day in the united states. payroll data for the month of july. who saw august coming? still with me are my guests, marilyn watson from blackrock, jack flaherty from gam, and victoria fernandez. marilyn, we have you from london so let's make the most of it. will we get a hike from the bank of england? marilyn: 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 around

4.4% 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 npc decision, where we saw a 6-3 vote. i think we could definitely see a hike. jonathan: the bank of england has been criticized many times, and in many people's opinions, quite justifiably around the communication of interest rate hikes. have they communicated this one better? marilyn: i think they have done as much as they can. the bank of england is in a very, very difficult spot with brexit, with a whole range of different problems happening in the u.k. economy and also the politics as well, and the impact that the politics is having on the economy. so they are in a very difficult spot. i know they have been criticized in terms of communication, but i think as much as they can do, they have been pretty on message with this. jonathan: is a nonsense argument, but presented by many people, many educated people, 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? jack: i think they do.

one of the messages that might come out here is that they will be watching the politics unwind year and forward, so this might be it for a while. jonathan: why hike into messy politics? jack: because some of the inflation numbers are -- if you are doing your job, you should be looking at that and you should be hiking. it is an open economy, and there are a lot of things to be said in terms of brexit not only hurting some of the also in terms but of inflation for how the prices follow through. marilyn: that's right. i think were expecting the one hike. now we have the second to keep hiking like the fed is. and i think the economic data, inflation definitely does warrant a rate rise. and monetary policy is still in thebly accommodative u.k. as well. so i think they have their mandate and 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 decision, so a lot on deck next week. from new york, this was "real yield." ♪

alix: alix: big earnings, big cash, big buybacks. big oil's catchword triggers jew she shareholder returns with shell announcing a $25 billion buyback. u.s. independence on deck. lng soybeans to the rescue. president trump called a cease-fire with europe as they look for a way to buy more soybeans in lng. it's getting hot, hot, hot. the drought in texas decimates crops and california's power prices pop. ♪ alix: i'm alix steel, and welcome to "bloomberg commodities edge." it's 30 minutes