>> from new york city, i am jonathan ferro. this is 30 minutes dedicated to fixed income. yields "bloomberg really ." ♪ jonathan: coming up, u.s. strength in the face of fertility elsewhere. wrapping up a messy week for emerging markets gripped by bearish sentiments, and looking ahead to chair jay powell speaking in jackson hole, wyoming. we begin with the u.s. decoupling from the rest of the world. >> the u.s. is enjoying exceptionally strong growth. >> is part of the divergence,

one of the themes for markets in the global economy. >> the u.s. is delivering twice the earnings growth of the rest of the world. >> for now, the linkage is entrenched. >> if companies keep delivering, it is hard to make the argument against equity. >> the u.s. is continuing to break out in fundamental and technical basis. >> these companies are executing and if the prices were going up for no other reason than the story sounds sexy, that would be a different matter. >> when you look at the u.s. economy and what the trump administration has done in terms of providing fiscal stimulus, it is going to continue. >> the u.s. is a -- has 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. jonathan: joining me around the are my guests.

let's begin with you. can this continue? >> i am not sure. if you look at the treasury market in general, the economy this strong, we have focused on the lack of wage inflation and -- wage inflation to buy into the longer end of the market. 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 3 or 3.25, and it, too, is the strength of the dollar. when the dollar is getting stronger, they thought it would be short-lived. we are dealing with a stronger dollar against a bunch of major currencies. i don't know if that is a short-term event or long-term event. either way, if it was not for that, you probably would be at 3%. jonathan: there are two basic ways to think about this, either you think the decoupling continues or you think it will end with u.s. growth decelerating. which one is it? >> the u.s. decoupling continues, but it is a

phenomenon 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. jonathan: it raises the question whether you are with the decoupling side of the story, and if you want to apply it to a trade, a wider spread like the u.s.-bund spread. >> the u.s. can continue to decouple for a lot of reasons. it is about timing of when we recouple. while you are waiting, they are not going to blink, they have a lot of treasury supply. given that it is a bearish sentiment, people do not think it is sustainable. if you really press people, people will push back and say it is a temporary growth the story. what if it is not? that is where the pain really lies. jonathan: here is the big story. i've spent a week discussing this. express that in the market, what is the trade? how to put money to work if that is your view? >> i think the higher rate

overall is being short, it makes sense. we are in this nomad land and we are in a tug-of-war. we come into the third quarter, into september, where everybody is back in their seats, and this data is not going to be that horrific. you can easily break three. jonathan: i think we have been lulled into a false sense of security. i just wanted to what extent you think we have been by issues such as turkey and the traded discussion where yields are longer and have been 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. we are looking at 3 or 3.25 to the end of this year, and the trade is certainly too short treasuries, longer dollar versus everything else. 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,

but being u.s. centric, there is plenty to do there already. jonathan: does that make sense to you? >> it does. but it comes back to the basics. unless we see a weaker dollar, unless we see some form of inflation, yields are not going to go up a whole lot. probably the worse short in the world is the 10-year because of all the other reasons we have driven yields down to 10 basis points. jonathan: the spread to u.s. treasuries, i think they are the widest since early 2016 we had a real concern in china and emerging markets. does that differential between emerging markets and the united states add up to you? >> again i have to go back to , the strength of the dollar. it is creating this differential. why are treasuries more attractive today than they were three months ago? because the dollar is stronger. not because there is a weakness in the economy or there is the flipside of this, emerging markets are weakening because of the strength of the dollar.

those of dollar denominated assets in which you are lending is costing you more. the benefit for the spread differential favors treasury more than it probably has all year. jonathan: is it the most important variable for you right now, the strength of the u.s. dollar and what happens with it? >> one step deeper the funding , conditions around it. 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. the funding aspect dollar, you are not seeing it really the way it should be in libor spreads 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 park their money that is keeping funding pressure at the banking level low. but the next iteration of the em crisis will be the funding aspect. not just spreads widening. jonathan: are we starting to see that already though?

i've been saying all week, our deficits, your problem. our currency, your problem. our monetary policy, your problem. when does it become a problem for the united states? >> there will be feedback at some i do agree, it is more point. about 2019 story but we are getting episodes of body blows to the market. with the vix, italy -- anything that is kind of a spread in the risk contract tree is getting hurt. we think we will have more but it will not be the linear price action. jonathan: i keep peering about this, and a lot of people describing it as a rolling bear market. is that how you would describe it? em equities on the brink of a bear market, is that what all of this is, a rolling bear market where the united states is not decoupling, just lagging? >> yeah, it does feel that the way, doesn't it? you get these idiosyncratic problems which all add up to a more systemic problem.

we are seeing problems right way in lots of different markets, but it is all about liquidity withdrawals to me. 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. you get a commodity rank we've had in the last two or three weeks, and there is very little to stop it. in some ways it is 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. jonathan: let's talk about em. i caught up with our columnist earlier this week, take a look. >> if you are overexposed to turkey, i would reduce exposure. i think turkey is trying to rewrite the crisis management chapter in the playbook for emerging markets. it is trying to go without the

interest rate hikes and without the imf. that is not impossible but it is hard. jonathan: he followed up by saying if he was back in the game, he would be loving what is happening right now because the market is not the french in between strong names and weaker names. >> i agree. in the case of turkey, they are ignoring the signs in front of them. with the idea of keeping growth alive, so they are not to -- not 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. but i do not see why they are not reaching out right now. jonathan: is it still idiosyncratic? >> the fact that these are really large reasons within the em, affecting other areas, argentina was also in the news and brazil's elections coming

up. that will be a key focus. idiosyncratic but really big blocks of the em space. itself.kind of feed on however, the market does have a tendency to create this cap risk. it is also august. i do think we have thrown the baby out with the bathwater on some of these em names. jonathan: we have seen this with august,en it wasn't where you expected liquidity and liquidity was no longer there. the lira, it should be a liquid currency, but it is this wide this week. this is happening outside of august, too. >> true. but i think it exacerbates it. once you get into the fall, i think we will get a true sense of where valuations should be. if you look at overall market conditions, we are pretty much unchanged. treasuries did not do much this week. major 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. i think markets are expecting more volatility in the fourth quarter. jonathan: you are all staying with me. coming up, the auction block, technologies got $11 billion in one of the largest deals of the year. that is next. this is "bloomberg real yield." ♪ ♪

♪ jonathan: i am jonathan ferro and this is "bloomberg real yield." i want to head to the auction block. we start in turkey. amid a currency crisis, turkey selling $60 million in two year notes, the 25% yield attracting over twice the amount of sold in bids. europe is having a more

difficult time. that primary credit market seeking its slowest week since the brexit vote, which is to deals amounting to one billion euros coming to market. finally, u.s. credit rolling along, united technologies barwin $11 million for the rockwell acquisition. yields dropping 30 basis points between pricing and the auction. still with me, kevin giddis, george goncalves, and luke hickmore. week andspent this caught up with pimco and we talked about how they turned cautious and defensive and one of their funds. my question, i hear this a lot about turning cautious and defensive but i try to reconcile that with what has done really well in fixed income. there is nothing cautious or defensive about that. how do you make sense of it? kevin: 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 has been a yield play for the last the two years. you offer me 25% for two years in turkey, i will probably take them. jonathan: maybe that is the reason you want to get cautious and defensive. convertibles are doing really well at this year. triple c is doing pretty well this year relative to what investment grade has done. it is now the time to get defensive and to go elsewhere and park some money in cash. luke: yeah, but slowly. we have been selling rallies rather than buying bids. 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. yes, but slowly. jonathan: i spoke to pimco and then i spoke to blackrock. blackrock said to me quite recently, the total return, income is now the important component.

the capital return side of the story is not there anymore. component is so much more dominant, is that your view? george: i agree. that is why assets are in high demand. overall, you need income to offset the losses in the principal side because we are , going to see one more leg of the bear market. you want as much cash flow as possible. jonathan: talk about this on-bear market where is it? , >> it is in hibernation. jonathan: i do not see this market. do you? kevin: i do not. it is on it's probably fifth iteration in the last three years. it's 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 this inflation that the tariffs is supposed to bring in, where are all these other things we had thought? jonathan: give it time is the message that comes. we are talking about this almost through the prism of looking at u.s. markets. externally, foreign investors, are they starting to allocate more in the united states? george: there was a lull for the better part of this year that 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. he is had that shift. -- we have had that shift. if we see foreigners coming back in, i am not sure we are there yet. yields are getting high enough that there could be attraction for foreign capital and the dollar story, but i am not sure. jonathan: kevin? kevin: it has been domestically

driven on the buy side but the like of selling from china and japan is the reason we are not so much higher. turkey, russia is selling u.s. treasuries, it is not a big deal. only when you get into the top two or three sellers is it going to drive yields higher. jonathan: high yield is trading to its tightest in investment grade in the united states. i think for this cycle. your view on 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 u.s. high-yield here. but it is a case of, maybe rebalancing your portfolio to quality from lower quality stuff, to 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 in the yuan -- in the u.s. that worries me around that. it is a trade that we will be doing all next year. jonathan: 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 can grind it tighter to investment grade when the junkiest of the junkest has already done what it done here. kevin: if you are going to see that happen, i would move up into a higher grade in corporate. i would be four to five years max and try to get my back end yield out of free bonds. jonathan: kevin giddis, george goncalves, and luke hickmore sticking with me. in the markets, twos, tens, and 30's shaping up as follows. it has been a smooth front end of the curve and smooth elsewhere as well.

still ahead, the final spread and looking ahead to jay powell's speech. that is coming up next. this is "bloomberg real yield." ♪

♪ i am jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. in the next week, the greek prime minister marks the end of bailouts. we get minutes from the fomc meeting, and said -- fed chairman jay powell will speak at the central bank and gathering in wyoming. still with me in new york city is george goncalves, kevin giddis, and the luke hickmore . i haven't heard many people talking this week about jackson hole next week. it seems to be downplayed, why?

>> it is more of an academic exercise. they are not really worried about a major change in the fed, they are entrenched in their policy right now. it would take a lot for them to change it. perhaps you could see some acknowledgment of the em vol, but we think that is wrong. we think that's basically what we are waiting and seeing. jonathan: the idea of the federal reserve is going to respond anytime soon to international situations, are they? i see no sign of that. luke: no, it does not seem likely. maybe we will get a little bit of a chat about what they expect a happen with wage markets in the u.s. and why they are not really picking up and we are not getting much of an impact from that. if i was a fed chair, i would have that chat next week. jonathan: the ecb coming up as well, kevin giddis, your thoughts of what is going on

with the balance sheet, a lot of people laser focused on that 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? kevin: i do not 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 supposed to end up as. i think they will continue down that path. there is no reason not to do that. the fed has been awfully quiet in general 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 , maybe 95%, that they are going to raise rates in september. the better story is what that means afterwards. what is going to happen after that? jonathan: 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. all these other things making this recovery different than prior recoveries. i think the fed is a knowledge enough. it could lean on the academic side and not really impart any new information on monetary policy evolution. jonathan: i am sure the market will find something. twos and tens spreads, 25 basis points, 23 basis points -- we are getting to that point that they are going to be concerned, now is the time? luke: i do not think they are. i think they are not particularly concerned until we get a -2 on those. it does not seem you will get there any time soon. the said, i think if we see two rate hikes we expect this two in 10ush the years, and we could still be at 24, 25 basis points at the end

of the year. jonathan: luke hickmore from aberdeen investments. a special thanks to kevin giddis and george goncalves. that does it here in new york city. we will see you next friday at 1:00 p.m. new york time. this was "bloomberg real yield." this is bloomberg tv. ♪ retail.

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and it can be included with your internet. which could save you hundreds of dollars a year. plus, get $150 dollars when you bring in your own phone. its a new kind of network designed to save you money. click, call or visit a store today. manus: you are watching the best of bloomberg daybreak middle east. askey rattles markets president erdogan stands defiant. the lira gets smashed, emerging markets feel the pain has contagion spreads. is saudi arabia about to help? demand for properties missing on second-quarter net income. we hear from the cfo of one company. ♪