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." ♪ coming up, turkey edging towards financial meltdown. authorities failing to stem the market route. u.s. sanctions begin to rival trade tariffs for the biggest risk in emerging markets. treasury markets rallying, sucking up a record-breaking week. we begin with a big issue, a meltdown in turkey. >> it is no longer about policy, it is about credibility. the central bank of turkey has almost no credibility.

there probably needs to be personnel changes. >> as far as turkey goes, we have been uncomfortable with the policy mix for a while. >> it is disconcerting what we have seen in the steps from the turkish government and the politicization of the central banking system and his appointment of his son-in-law as the head of economics. i think for investors, you want to be cautious on turkey. this is not the time to be considering turkey. >> the market has a sentiment as to there is some lack of credibility, lack of action that means the currency can continue weakening. >> they need decent people in key positions like the central banks and finance ministry. they need real policy, higher rates, tighter fiscal. jonathan: joining me around the ande is kathy jones, luke,

coming to us from boston is kathleen gaffney. we are going to get to broad em in a moment. i want to focus on turkey. kathleen, looking at the way they have handled it. what can they do to regain credibility? >> they are running out of options. they do not have credibility and looking at currency, there is fear and uncertainty. it is also an important country in terms of geography, relationships, and trade for europe in particular. at some point, a solution must be found. jonathan: kathy jones, looking at this situation, is the management of the crisis a crisis or the crisis? >> they were already fragile to begin with because of the large current account deficits. since the election, since the

changes at the central bank, you have a lack of credibility compounding it. they do not have a lot of good options. they could raise interest rates, tighten fiscal policy, go to the imf. none of those are palatable. jonathan: they are not asking for help. for our u.s. audience, it is the equivalent of having jared kushner pushing out jay powell and having the president running the federal reserve. that is where we are at in turkey. >> that is true. a lot of concerns we have, we had marc chandler say there is no interest rate at which the lira could be stabilized. when i hear that, i think this is totally management. a couple of weeks ago, all we needed was for turkey's central bank to act like a central bank should. this could move toward a general

betterment of the situation. now we're talking, we need a fiscal package, imf involvement. jonathan: i spoke with jane foley and she said we need 500 to 1000 basis points of hikes just to stabilize the situation. just to address it. size get itof any done? >> an interest rate hike of any size does not get it done. it comes down to the credibility and policy makers saying the right thing, backing down. turkey is too big in terms of its political connections to not back down. you're looking at, either way, no matter what, a hard landing for the country. that means you got financial risk within the banks and tourism and trade go out the

door. that is not sustainable. i do think the language is going to term. jonathan: let's move the conversation on. when a currency crisis becomes a financial one, a systemic risk. are we going in that direction? >> turkey's relationship with the rest of the financial system is not near what some countries would be. it can be contained but i agree with kathleen, things have to be done quickly. as we saw in 1997-1998, if you do not act quickly to stabilize things, it tends to make investors pull back and say i do not want to be invested in this situation. jonathan: it is not that people are expecting that to happen. it is that the question is being asked, reporting about the ecb having concerns, big lenders

having concerns about loans denominated in euros. all of a sudden you have a problem if you are a turkish borrower. is that the next leg of this? >> i think so and i think that is what the market is showing you. we have moved on to the next domino. this is not the first day we have had the lira down. we have moved on. i think one way to put this into perspective is, i do not think there is massive turkey exposures. but that concept of the sovereign bank doom loop, what that does to your capital, the expectation of italians will need to come in and then they lose value. i think that kind of situation would be if we saw escalate next-door where we see it going. jonathan: i want to get the central bank response as far as you can see it developing and get the broader em call.

jay powell has been pretty clear, he was clear in switzerland that he thinks people overstate the role of the fed in these situations. does the ecb have a role to play? to what extent do you think the situation as it evolves in turkey right now threatens the ecb's ability to roll forward with this plan? >> that is going to be the problem because if it does affect the banking system, they cannot withdraw more liquidity if the banking system in europe is under stress. that would not happen. i think at some they have to be point having discussions with the banks in europe to make sure those funding lines are open and i would assume they're reaching out to turkey to come up with some interim solution to stabilize the situation. jonathan: if they accept or want the help. kathleen, do you think there is something on the radar? changes or expected policy moves from the ecb and coming months?

i think kathy is exactly right. there is communication going on through backdoor channels. it is not so much the european banks, the amount of exposure, but it is the lending to the corporations in turkey. when you think about these sovereign, their largest importer is bulgaria. it exports about 5% of their gdp to turkey. with the sovereigns of poland risk toary being at turkey, the ecb has tremendous incentive to provide liquidity. jonathan: the buzz word is idiosyncratic. let's talk about what this means or broader em. i keep getting told every time i bring up emerging markets, the problem is idiosyncratic and the spillover will remain local. is today different? have things changed?

>> today, you are seeing more of a broader risk off tone. that makes sense because what is most likely happening is for those funds that have exposure to em broadly, they're going to want to make sure they have enough liquidity. you go to the most liquid countries to raise that liquidity. so we are seeing selloff in local markets but i do not expect that to last. this is not the asian currency crisis. we have floating exchange rates. most countries have reduced external debt. you are seeing the weaker players selloff and that is where there will continue to be worries with the dollar rallying. i continue to believe em is idiosyncratic, not just an asset class at risk for further contagion. jonathan: kathy? >> i will take the other side of

that trade. every time i hear something is idiosyncratic, it is not. it may not be of the same magnitude of other crises we have seen. but it is hard in smaller, less liquid markets to separate out and isolate when you are in the throes of a situation like this. later on, there will be some bargains. for the moment, it spreads from one to another and it is never different. jonathan: when you look at the situation and you have this many countries that need to raise short-term rates aggressively, do you choke earnings? before you know it, you've got a different kind of problem? >> i think so but when we are thinking about contagion, we should be looking at countries that look like turkey. i think the issue is that right now, it is not clear there is a country with the private credit tilde -- that it build up and external imbalance of that is on the same scale or magnitude. kathy's point, one thing that could make this less

idiosyncratic is you have this big move in the dollar. if that happens, that would make problems more generalized. it is making problems more generalized and that is the thing to watch. jonathan: it has been great to have you with me. sticking with me is kathy jones and kathleen gaffney. coming up, a record week for treasury issuance and it went fine. that is next. this is bloomberg. ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block where there were record treasury auctions this year for

the 10 year bonds and 30 year bonds. $18 billion for 30 year. tenure, above average for the last three quarterly. it went fine. on the corporate side, more bonds sold than in the previous two weeks combined. one highlight was starbucks , which auctioned off $3 billion 7, 10, and 30 year note spewed in high-yield, issuance was nearly $9 billion, the second busiest week year to date and the most active since march. a high demand auction was bmc, a triple see credit funding, $1.4 billion for the $1.5 billion issue. we now turn to elon musk and tesla. questions remain, is funding secure or not? >> we have breaking news, elon musk of tesla tweeting he is considering taking tesla private. at $420, funding secured.

>> going private at that level would not make sense. >> there is no mention of financing. even though he tweeted funding has been secured, it is not anywhere in the blog post that would allow people to see how this would be financed. >> the general thing that everyone is focused on is when mr. musk said funding secured, was funding secured? >> we have not had any major investment bank say that funding lined up. -- cannot show that, show that, this is a major negative. >> everyone has been talking about this as a leveraged buyout. you cannot do a leveraged buyout of a company that is indebted and needs to spend more to keep growing. >> i do not understand the idea of what was suggested for them to go private. that is obviously a large valuation to take in and taken to the private market. jonathan: what a week for tesla. still with me, kathy jones and kathleen gaffney.

joining me now is joel levington. kathleen, what an episode we have had. how unusual is this for a credit like tesla to be acting like this? >> it is unusual. i do not know whether it is the heat of the summer, but egos are prevailing in the markets over the last week or so. it is also indicative of where the technicals are driving the market. it is all about what will the market there -- bear? it was just over a year ago we were talking about tesla and how attractive the new issue was. on a relative basis, it looked attractive. all of a sudden, the market is shifting because there are demands to be had when you issue in the public market. there is appetite for private debt because it seems attractive

in terms of long-term returns. but is this just one more trap that tesla is getting into without understanding the way markets work? jonathan: the one-year anniversary of that 2025 notice is next week. for that maturity, a record low yield. what changes for that note? we have few details. does that covenant get triggered with the plan? >> it does not appear the covenant is going to get triggered because you need a controlling stake holder, someone owning more than 50%. elon said that was not going to happen. given that situation, now you have a bond, that if it goes private, will remain outstanding and it brings up the issue of structural subordination. for framework we have is that leaders take a two notch differential between corporate

credit rating and where the unsecured will be. meaning, the debt that will be piled up in front of the unsecured note holders. when you look at a triple c credit curve, a 2025 bond should be yielding back 5% which is points below are the bond is today. that graphic, it is important. where we trade now on the tesla 2025 is in line with the single b curve you'd -- curve. >> either the market is assuming nothing is going to happen but it is not protecting against the downside risk if something does happen. conversely, if you are talking about convertibles, there is opportunity there. if the deal actually closes at $420, our fair value estimate would be 2027. ,onathan: if the convertibles

we are above 360 on the equity market. would that be positive for 2025? >> it would in the short term. you go through discussions. there is $1.5 billion debt due in 2019. chunk march 1,g $920 million. that has a $360 conversion price. if you happen to be in the money, it might be money that gets rolled over. jonathan: i don't know how may times when you play the game of do you want to buy the 2025 note. look at the situation with tesla. >> this one is idiosyncratic. the junk market has performed well this year. we are neutral because spreads are tight. we think you have earned the coupon this year. you've not had any trouble with absorbing big supply. i think this one is a one-off, just a strange situation. jonathan: kathleen, the supply dynamic changed this week. we had some triples the --

triple c's come to market. we had record treasury issuance. the market in the united states is doing fine, absorbing this, isn't it? >> it is and the appetite i think reflects that reach for yield is still driving the markets. it is the technicals, and until we really see rates move to the upside, the u.s. is looking very attractive in terms of 10 year, 30 year, good demand, more attractive yield and no one is worried about inflation. with triple c, reaching for yield no matter what the fundamentals are. i have yet to hear anyone talking about the importance of cash flow. that is a market being driven by technicals, not reality. jonathan: kathleen gaffney, joel levington, and kathy jones. i want to get a market check of where bonds have been, stable

until today. the 10 year treasury yield down by eight basis points. 287. a bit into the backend, on the 30 year. still ahead, the final spread and the week ahead. a big week for retail, with earnings and economic data. this is bloomberg real yield. ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. over the next week, we will be keeping an eye on news around tesla and a board review of elon musk. plus, we get retail data, brexit talks and data coming out of the eurozone, including cpi and a lot on the u.k. including retail sales and cpi. a whole lot more. still with me, kathy jones, joel levington, and kathleen gaffney.

this week, there is a news flow with important moves from the most talented portfolio manager s on the planet, dan iversen, trying to separate away from the accommodation they provided to the market for many years. this is being replaced by politics. we think this means lower return and higher volatility. the combination creates a more challenging investment environment. is it time to get defensive? >> that has been one of our themes this year. as the central banks tighten monetary policy, the era of easy money is ending and that is going to raise volatility and make it tougher to get those big outsized returns without risk premium. we think a lot of markets have to reprice because risk premium is tight. jonathan: kathleen, a big

concern is liquidity. you have seen some examples start to build up where there is not enough liquidity. is that a concern for you? >> absolutely. i think we are going to see more of it and it is going to be a challenging environment for investors. in terms of getting defensive, i'm not sure what that means since developed sovereign markets are expensive with rates likely to move higher and credit markets are tight as well. i think a lot of the volatility and possibly where the return potential is going to come from is non-u.s., particularly currency, because that is where the growth potential longer-term is likely to come from. it is a big question whether china is slowing but will it continue to provide enough liquidity to other markets to keep them up? jonathan: final word, joel?

>> our credit strategist has also gone with the stay short, stay defensive approach. energy stands out as being wider, communications because at&t and verizon make up so much. on the short end of the curve is where he appreciates claims. jonathan: it has been great to catch up with you. a fascinating week for fixed income and beyond. joel levington from bloomberg, kathy jones from charles schwab, and kathleen gaffney from eaton vance. that does it for us from new york. we will see you next friday. this was "bloomberg real yield." this is bloomberg tv. ♪

yousef: welcome to the "best of bloomberg daybreak: middle east ." the major stories driving headlines this week. manus: and run sections kick in putting more pressure on the president. he says he is even more open to negotiations but urges the president trump to put a knife back in the pocket the labor . yousef: but turkish lira hits another low. suspendsudi arabia somatic ties with canada in a dramatic escalation of a dispute over the kingdoms are rest of women's rights activists. ♪