david: -- >> from new york city, i am jonathan ferro. this is bloomberg real yield. ♪ >> coming up, u.s. in the face of fragility. wrapping up a messy week for emerging markets gripped by bearish sentiments, and the looking ahead to chair jay powell speaking. the u.s. decoupling from the rest of the world. is enjoying exceptionally stronger growth. the u.s. is delivering twice

the earnings growth of the rest of the world. >> for now, the linkage is entrenched. >> it is hard to make the argument against equity. is against fundamental and technical basis. these companies are executing and if the prices were holding up, the story -- that would be a different to net. u.s.en you look at the economy and what the trump administration has done in terms of providing fiscal stimulus, it is going to continue. as a policy led growth spirit for the rest of the world has been a combination of hawkish. >> i think the pace is more than sufficient. >> joining me around the table is kevin giddis. head of u.s. rate strategy for fixed income, and coming to us, really pleased that he on the show. let's begin with you.

can this continue? >> i am not sure. if you look at the treasury market in general, the economy the strong, we have focused on the lack of wage inflation and it might be a stronger dollar and contagion so the two big misses in the forecast this year, one is that the 10-year is going to three .2 five, and it too is the strength of the dollar. when i thought getting stronger, they thought it would be short-lived. we are dealing with a stronger dollar in a bunch of different currencies. if it was not for that, you probably would be at 3%. theither you think decoupling continues are you think it rick with u.s. growth decelerating or which one is it? >> the u.s. decoupling continues, but it is a and probably the

second half of next year, i think the decoupling will have stopped. this is broad, forward growth and not long-term structural change. raises the question whether you want to actually play that and apply it to a trade which is a wider spread. the u.s. can continue to decouple for a lot of reasons. it is about timing of when we read couple. while you are waiting, they are not going to blink, they have a lot of treasuries up -- treasury supply. given that it is a bearish sentiment, people do not think it is sustainable. if you really press people, people will say is a temporary growth the story. what if it is not, that is where the pain really lies. jon: express that in the market, what is the trade, how the put money to work if that is your

view? >> higher price overall being sure to make sense. and wein this nomad land are in a tug-of-war. we coming to the third into september where everybody is back in their seats, and this is not going to be that horrific. you can easily break 3. jon: i think we have been false sense of security. beens as a longer and have capped by sentiment issues more than anything. >> yeah, i would agree with that. it is a good point that george is making about issuance with the u.s. treasury as well. .25 to looking at 3 or 3 the end of this year, and the a longercertainly dollar. i am not sure if i would want to be playing a spread between the u.s. and other parts of the

world. there is so much else going on, being u.s. centric, there is plenty. jon: does that make sense to you? >> it does. but it comes back to the basics. and less we see some form of inflation, yield and not going to go up a whole lot. in the world is the 10-year because of all the other reasons we have given it down 10 basis points. the spread to u.s. treasuries, i think they are the we had ance early 2016 real concern in china and emerging markets. does that differential between emerging markets and the united states added up to you? >> i have to go back to the strength of the dollar. why are treasuries more attractive today than they were three months ago -- because the dollar is stronger. not because there is a weakness thehe economy or there is

flipside of this, emerging markets are weakening because of the strength of the dollar. what you are lending is costing you more. the benefits for the spread differential favors the treasury. jon: the strength of the u.s. dollar and what happens with it? >> the funding conditions around it takes it one step deeper. what the fed is doing with their balance sheet, people do not like to focus on it. but the draining of liquidity is going to pick up. you are not seeing it really the way it should be partly because of the tax reform. we have had a lot of dollars coming back to the u.s. they are finding go place to keep funding pressure at the banking level low. the next iteration of the em crisis will be the funding aspect. jon: are we starting to see that already though?

i've been saying all week, our deficits, your problem. our currency, your problem. when is a become a problem for the united states? is more about it 2019 story but we are getting episodes of body blows to the market. taly -- anything that is a spread in the risk contact trade is getting curve. we do is -- hurt. it will not be the linear price action. jon: i keep peering about this, and a lot of people describing it is rolling bear market free is that how you would describe it? em equities on the brink of a bear market, is that what all of this is where the united states is not decoupling, just lagging? >> yeah, it does feel that the way. you get these idiosyncratic problems which added up to a

more systemic problem. seeing problems right away and lots of different markets but that is all about the liquidity. it is exposing the tensions and troubles around the world which are coming out aggressively. you get an em blowup and there is nothing to stop it from happening. andget a commodity rank there is very little to stop it. quite nice, a lot more choices and things that we can do, but it is going to be a rusty year. not leaning so much on the central banks. jon: let's talk about em. with the columnist earlier this week, take a look. >> if you are overexposed to turkey, i would reduce exposure. turkey is trying to re-write

the playbook for emerging markets. it is trying to go without the trade hikes. it is trying to do it without the imf. that is not impossible but it is hard. jon: he said if you is back in the game, he would be loving what is happening right now because the market is not the differentiating. agree.tally in turkey, they are ignoring the signs in front of them. with the idea of keeping growth alive, so they are not to raising interest rates as fast as they need to. they are not seeking help from the imf. it is hard to think that this is not just one bad case after the other that could cause a contagion. i do not see why they are not reaching got right now. jon: is it still idiosyncratic? >> the fact that these are really large reasons within the em -- argentina was also in the

news and brazil's elections coming up. idiosyncratic but really big blocks of the em space. however, the market does have a tendency to create this gap. it is also august. the think we have thrown baby out with the bathwater on some of these em names. jon: we have seen this when it was not august and liquidity was no longer there. it should be illiquid currency, but it is this wide this week. this is happening outside of august, too. >> true. but i think it exacerbates it. in the fall, we will get a true sense. look at overall market conditions, we are pretty much unchanged. currencies are pretty quiet. euro did touch a near-term low but it did bounce back. we are not seeing momentum in

the big markets. vol is sitting there. it has not gone away. markets architecting more volatility. up, the auction block, united technologies firm $11 billion in one of the largest deals of the year. this is bloomberg real yield. ♪

♪ jon: i am jonathan ferro and his is "bloomberg real yield." we star in turkey. a currency crisis, turkey selling $60 million in two year notes, attracting over twice the

amount of sold in bids. europe is having a more difficult time. it is seeking to its lowest week isce the brexit vote, which amounting to one billion euros coming to market. , $11credit rolling along million for the rockwell acquisition. dropping 30 basis points between pricing and the auction. still with me kevin giddis, george goncalves, and luke hickmore. pimco i caught up with and we talked about how they turned cautious and defensive and one of their funds. turninghis a lot about cautious and offensive but i try to reconcile that with what is done really well in fixed income. there is nothing cautious or defensive about that. how do you make sense of it? whatever they say about cautious and defensive is not necessarily what is happening in the current market especially on

the long end of the curve where investors are willing to take a lot more credit risk. it is been a yield play for the last the two years. you offer me 25% for two years in turkey, i will probably take them. jon: convertibles are doing really well at this year. triple c is doing pretty well this year, it is now the time to get defensive end to go elsewhere and parks of money in cash. luke: yeah, but slowly. we have been selling the rallies rather than buying bits. a lot of the trades that worked in the last 10 years are running out of steam. the long financial straits versus everything else, that feels like it is getting very old in the teeth and there is not a lot left. jon: i spoke to pimco and then i spoke to blackrock. income is now the

important components. the capital return side of the story is not there anymore. the income component is a much more dominant, is that your view? george: i agree. that is why assets are in high demand. yet the offset the losses in the principal side because we are going to see one more like of the bear market. you want as much class flow as possible. jon: talk about this, where is it? >> it is an hibernation. jon: i do not see this bear market. do you? kevin: i do not. lacking the principal legs it needs and that is inflation. primarily wage inflation. as i said before, when you throw a stronger dollar on top of it, you are going to create demand globally and that is why every auction is oversubscribed and

better than the last one and will continue to be that way until we see a change in prices. where is disinflation that the tariffs is supposed to bring in where all these other things we had thought? jon: give it time is the message that comes. we are talking about this through the prism of looking at u.s. markets. george: sure. jon: externally, foreign investors, are they starting to allocate more in the united states? lull thatere was a foreign investors were not participating. this is an investment driven bond market. it has been more u.s. investors over foreign investors and since the fed started hiking. if we see foreigners coming back in, i am not sure we are there yet. yields are getting high enough that there could be a traction for foreign capital and the dollar story, but i am not sure. jon: kevin?

kevin: it has been domestically driven on the buy side but the lack of selling on china and japan is the reason we are not so much higher. is selling u.s. treasury's -- is not a big deal. n the top three are two sellers that is not a big deal it is going to drive yields higher. jon: high yield is trading to its tightest in investment grade in the united states. your view one, that chart and how you think this plays out from here. so, in the context that we are slowly getting less and less bullish rather than more and more bearish, we would be selling to u.s. high-yield here. if the rebalance -- case portfolio tog your

recognize the high leverage position that a lot of these companies are in, and it is that 2020 story of a real slowdown in growth that worries me around that. it is a trade that we will be doing all next year. jon: it seems to be that could be the trade for a lot of people because a lot of people struggle with the idea that high-yield when the junk of the junk est has already done what it done -- it has done this year. kevin: if you are going to see that happen, i would move up into a higher grade incorporates. i would be four to five years max and get my back year yield in free bonds. kevin giddis, george goncalves, and luke hickmore sticking with me. it has been a smooth

front end of the curve and smooth elsewhere as well. still ahead, the final spread powell's speech. this is bloomberg real yield. ♪

♪ jon: i am jonathan ferro. this is "bloomberg real yield. it is time now for the final spread. greek prime minister marks the end of bailout, minutes from the fomc meeting, and chairman jay powell will speak at the central bank and gathering in wyoming for yet still with me in new york city is georgia gun goncalves,rge kevin giddis, and the luke hickmore from aberdeen asset management.

things seem to be downplayed a jackson hole, white? >> it is more of an academic exercise is not really worried about a major change in the fed except for being entrenched and policy right now. it would take a lot for them to change it. speculation that you would see some acknowledgment of the em vol, but we think that is wrong. we are waiting and seeing. jon: the ideas of the federal reserve is going to respond anytime soon to international situations, are they? i see no sign of that. no, it does not seem likely. maybe we will get a little bit they expectout what a happen with wage markets in the u.s. and why we are not really picking up or impact from that. if i was a fed chair, i would have the chat next week. up as well, coming kevin giddis, your thoughts of

what is going on with the and asking the question of whether they might pause balance sheet runoff. any reason to believe they will? what is the appropriate level of the balance sheet anyway? think they are going to stop or pause the normal runoff for the balance sheet. they've been working on this for the last 14 to 16 months. you are probably one third of the way of where you should be when you think about where the balance sheet is a post -- balance sheet is supposed to end up as. the fed has been awfully quiet this week so i do not know if that means there is nothing that is going to come out of jackson hole other than the expectation from everyone that they are going to raise rates. the better story is what that means afterwards. what is going to happen after

that? jon: the title of the speech is interesting. monetary policy in a changing economy. is that an expensive way of saying this time is different? >> we have the sharing economy. everything is making this recovery different than prior recoveries. lean on the academic side and not really impart any new information on monetary policy evolution. jon: i am sure the market will find something. basis pointnts, 23 -- we are getting to that point that they are going to be concerned, the now is the time? luke: i do not think they are. they are not particularly concerned until we get a -2 on those. that is not going to happen anytime soon. we push and you know what, we could be still 24th 25 basis

points at the end of the year. more from hick aberdeen investments. a special thanks to kevin giddis and george goncalves. that does it here in new york city. forill see you next time you for audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪

>> i am mark crumpton with first word news. a federal judge has extended a freeze on deporting families separated at the u.s.-mexico border giving a reprieve to hundreds of children and their

parents to remain in the united states. quote, "hastyd, deportation of children after reunification with parents would deprive them of their right to seek asylum." the judge's order did not specify at eig of when the rep -- did not specify a date of when the reprieve would end. blamingt trump officials for his ridiculously high cost military parade. the president blamed the local politicians for inflating the cost although much of the projected $92 million price tag to cost aircraft, equipment, and personnel. thursday, and was saidhe