30 minutes dedicated to fixed income. this is bloomberg real yield. coming up, edging toward financial meltdown. u.s. sanctions beginning to rival trade tariffs for the biggest risk in emerging markets. treasury markets rallying stacking up a record-breaking week of issuance. we begin with a big issue. a meltdown in turkey. is no longer about policy, it is about credibility. in the central bank of turkey

has almost no credibility at the moment. i think there probably needs to be personnel changes. >> i think 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. the politicalization of the central banking system. his appointment of his son-in-law as the head of economics. wehink that for investors want to be very cautious on the turkey. this is not the time to be considering turkey. >> the market still has a totally someto lack of credibility. lack of action. the currency can continue weakening. >> they need to decent people in key positions. they need real policy. proper policy. higher rates. higher fiscal. >> joining me is kathy. chief income strategist. luke from bloomberg news, coming

to us from boston, kathleen, director of diversified fixed income. we will get to a broad in a moment. i want to focus on turkey. and how they have handled the situation. -- especially way over the last 24 hours, what can they do now? to regain credibility. >> they are really running out of options. they don't have credibility. looking at currencies, you can see there is a lot of 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. >> looking at the situation right now, is the management a crisis for the crisis at the moment? fragile to begin with. because of the large current account deficits.

since the election, since the change in the federal bank, you have the lack of credibility of compounding it. they don't have a lot of good options. they can raise industry very steeply. they can tighten physical -- fiscal policy. none of those are palatable. to the administration. >> they are not asking for help. the united states is equivalent of having jared kushner as the finance minister -- minister. it is the equivalent of pushing a jay powell and having the president running the federal reserve. that is where we are at in turkey. >> i think that is pretty much true. a lot of the concerns, we have had chandler say there is no way interest rate at which the lira could be stabilized. like that ithings think this is totally management because a couple of weeks ago, all we needed was for turkey's central bank to act like we thought the central bank would. this could start to move toward

a general betterment of the situation. now, we are talking we need a fiscal package. we need ims involvement. look at what is going on with turkish bank bonding. >> i spoke to jane foley. we will be 500 to 1000 basis points of hikes just to stabilize the situation. just to address it. does it have any side to get it done? and interest rate hike of any size does not get it done. it really comes down to the credibility and policymakers saying the right thing, essentially backing down. in terms ofo big its political connection to not back down. you are really looking at either way, no matter what, a hard landing for the country. that means you have got financial risk. within the banks.

-- banks. tourism and trade goes out the door. that is not sustainable. i do think the language is going to turn at some point. >> let's move the conversation on. when a crisis becomes a financial one. when it becomes systemic risk to the financial system. are we going in that direction? 's fortunately, turkey relationship with the rest of the system is not anything near what some countries would be. it can be contained. i agree with kathleen. things have to be done pretty andkly because as we saw 97, 98 come of the asian crisis, i don't add quickly to stabilize things. it does tend to make investors pull back and say i do not want to be invested in anything related to the situation. >> i think that is how the conversation has moved forward this week. it is not that people aren't -- expecting that to happen, it is the question is being asked. the times reporting about having concerns that there is some big european lenders with exposure.

those loans are denominated in euros. foreign currencies. all of a sudden, you have a problem if you are a turkish borrower. is that the next leg of this? >> i think that is what the market is showing you today. we have moved on. this was not the first day we have had a lira down. distinctly as the first month. we have clearly moved on. i think one way to put this into perspective is i don't think there is massive turkey exposures. the whole concept of a sovereign bank doom loop where if you are in credit you're seeing turkish right off. but that does yuan capital. which is also bcp's. the expectation of italians will need to come in and help. and bcp's lose value. i think that kind of situation would be if we saw it escalate next or where we see it going. >> i want to give the central bank response as far as you can see a developing.

and the broader em call. kathy jones. unlikely to respond. jay powell has been pretty clear. he was clear in may. does the ecb have a role to play? to what extent do you think the situation threatens the ecb's ability to roll forward with its plan? >> at some point, that will be the problem. if it does affect the banking system, they clearly can't withdraw more liquidity. when the banking system in europe is under stress. that would be -- that just would not happen. i think at some point they have to be having discussions already. with the banks in europe to try to make sure that they -- their funding lines are open and i would assume they are reaching out to turkey to try to come up with some sort of interim solution to stabilize the situation. >> that is the problem. kathleen, do you think there is something on the radar for the ecb here that changes expected policy moves in the coming months? >> yes.

i think she is exactly right. there is communication going on through backdoor channels. it is not so much the european banks. the amount of exposure, it is the lending to the corporations in turkey, when you think about the sovereign, their largest importer is bulgaria. bulgaria exports about 5% of their gdp to turkey. with the sovereign's of poland and hungary with bulgaria being at risk to turkey, the eu, ecb has a tremendous amount of incentive to provide some liquidity. first word of the week for me is idiosyncratic. theep being told him -- problems are idiosyncratic and the spillover will just remain local and condition. is today different? you are seeing more of

a broader risk off tone. that makes sense. happening islikely for those funds that have exposure, they will want to make sure that they have enough liquidity. you go to the most liquid countries to raise that liquidity. we are seeing some selloff in the local markets. i don't expect that to last for long. this is not the asian currency crisis. we now have floating exchange rates. most countries have reduced their external debt. you are seeing the weaker players, argentina, south africa, russia selloff. that is where they will continue to be worries with the dollar rallying. i continue to believe that em is idiosyncratic. not just an asset class that is going to be at risk to further contagion. >> i will take the other side of

that. every time i hear something is idiosyncratic, it isn't. this time is -- it may not be of the same magnitude. of some other crisis that we have seen. smaller,lly hard and less liquid markets to separate out and to isolate -- and isolate when you are in the throes of a situation. there will be some bargains. for the moment, it spreads from one to another. it is never different. >> when you look at the situation, when you have this many countries that need to raise short-term rates aggressively, you should -- you start to show growth's, earnings, they could slowly pick up and before you know it, you have a different kind of problem. >> i think so. when we are thinking about contagion, what we should be looking for is countries like turkey. now, ite is that right is not clear that there is a country with ideal private credit buildup and external analysis that is quite on the same scale or magnitude. kathy's point, one thing that

could make this less idiosyncratic as you have the big move in the dollar. if that happens, that will make problems a lot more generalized. it is making problems a lot more generalized. that is kind of the thing to watch. great to have you with me. sticking with me, kathy. kathleen. the auction block, a record week for treasury issuance. it went just fine. that conversation is next. this is bloomberg real yield. ♪

>> this is bloomberg real yield. i want to head to the auction block. some record treasury auctions.

$26 billion of tenure. $18 billion and 30 year bonds. a bit to cover on the 10 year with above average for the last four quarterly funding auctions. it went totally fine. side, moreorate bonds sell this week than the previous two weeks combined. one highlight was starbucks. auction of $3 billion at 7, 10, and 30 year notes. finally some action. issuance with nearly $9 billion. active since march. a high demand auction with bmc software. triple credit funding. 4.5 billion dollars for the $1.5 billion issue. funding, weecuring now turn to elon musk. tesla. is funding really secured are not> -- or not? >> elon musk tweeting that he is considering taking tesla private. $420 of funding secured. >> going private would not make

sense. ofthere is no mention financing at all. even though he tweeted it, it is not anywhere in the blog post that would allow people to see how this would be financed. there are a lot of? see here. >> the general thing that everyone is focused on is when mr. musk said funding secured, was funding secured. --we have not had any if you can't show that, this is a major negative for his stock. talkingone has been about the leveraged buyout. you can't do a leverage buyout of a company that is earning cash and is already quite indebted. and needs to spend more cash to keep growing. i don't understand the idea of what was suggested and the potential for them to go private. that is an incredibly large valuation to take in. and somehow taken to the private market. >> what a week for tesla.

kathleen, joining us now, director of global fixed income. i want to begin with you. your thoughts on episode we have had with tesla this week. how unusual is this for tesla to be be reacting in this way? is pretty unusual. it seems, i don't know whether it is the heat of the summer, egos are truly prevailing. in the markets, over the last week or so. it is also, i think indicative of where the technicals are driving the market. it is all about what will the market fair. it was just over a year ago, we were talking about tesla and how attractive the new issue was. on a relative aces, it looked attractive. now, all of a sudden, the market is shifting. shifting because there are demands we have when you issue in the public markets. there is a lot of appetite for private debt right now. it seems attractive.

in terms of long-term returns. thatis just one more trap tesla is getting into without understanding the way markets really work. >> one year anniversary of the 2025 notice. you pointed out to me, is next week. a record low year -- yield. moment?nges for the as we understand, so far, which few details we have, does that get triggered with the plan that we know so far? >> it doesn't appear that it will get triggered. you need a stakeholder that will be owning more than 50%. elon, in one of his many tweets said that was not going to happen. situation, now you have a bond that, if it goes private, will remain outstanding and it brings up the issue of structural subordination. our framework that we have is that leaders usually take a to notch differential between the corporate credit rating and

where the unsecured will be. that translates into the debt that will be piled up in front of the unsecured note holders. then, when you look at a triple credit curve, it will tell you that a 2025 bond should be dealing about 8%. within five or six points below where the bond is today. >> to put that up again, i think it is important, where we trade now on the 2025, is basically in line with a single be curve. nowhere near the triple c curve. that's right. either the market is assuming that nothing will happen, it is not protecting itself against the downside, if something does happen. if you were talking about the convertibles, there is certainly opportunity there. atthe deal actually closes 420, many of them could be the 2022. our bigger value estimate of the 147 on the terminal. >> convertibles are in the money and we are about 360 on the

equity market. that takes some of the burden away. with that be a positive? >> it would in the short term. there is a billion and a half debt that is due in 2019. into converts. there's one big chunk in march 1. which is not hundred $20 million. that has a 360 conversion price. if you happen to be in the money, that might be money that gets rolled over. >> i'm not sure how many times we have played that game on this program. how much of things changed for you? a broader picture. >> this one is idiosyncratic. the jones market has performed very well this year. we look at it, we are neutral tighte spreads are pretty we think you earn a coupon this year and you have not had any trouble absorbing the supply. i think this one is a one off. it is a very strange situation. dynamic changed this week. we had triple c's come to the

market. some record treasury issuance. to be clear, the market in the united states, it is doing just fine. absorbing this. >> it is. the appetite reflects that reached for yield is still driving the market. it is the technicals. until we really see rates start to move up to the upside, the u.s. is looking very attractive. in terms of 10 years and 30 years. good demand. more attractive yield. no one is worried about inflation. c, reaching for yield, no matter what the fundamentals are, i have yet to hear anyone talking about the importance of cash flow. a market that is really being driven by technicals, not reality. i want to take you with

market share. treasuries 2/10 and 30. remarkably stable until today. the 10 year treasury yield is down by eight basis point. bidding to the back and as well. three point 03%. your yield on a 30 year. a big week for retail with earnings. economic data as well. this is bloomberg real yield. ♪

>> this is bloomberg real yield. time for the final spread. coming up, we will be keeping an eye on any news around tesla. and a review of elon musk we get retail data. brexit talks. a ton of data coming out of the eurozone. including cpi. retail sales. cpi. a whole lot more.

this week, there is a news flow with a really important news from one of the most talented portfolio managers on the planet. now, the major central banks are trying to set -- step away. their influence is being quickly replaced by that of politics for both equity and fixed income investors. we think this means low returns. and higher volatility.

space, energies kind of fans out as being a little bit wider. communication with at&t and verizon makeup so much. on the short end of the curve is where he appreciates playing. >> great to catch up with you. kathy, john. and kathleen. that does it for us from new york, we will see you next friday at 1:00 p.m. 6:00 p.m. in london. this was bloomberg real yield. this is bloomberg tv. ♪ this isn't just any moving day.

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