jonathan: from new york city, i am jonathan ferro. with 30 minutes dedicated to fixed income, this is "bloomberg real yield." coming up, u.s. strength in the face of fragility elsewhere. can america keep decoupling? wrapping up a messy week for emerging markets gripped by bearish sentiments. and looking ahead to chair jay powell's speech 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. >> it's 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, but the delinkage 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. has a policy led growth spirit, whereas the rest of the world, it has been a combination of ad hoc issues. >> i think the pace is more than sufficient. jonathan: joining me around the table are my guests.

can this continue? >> i am not sure. if you look at the treasury market in general, with the economy this strong, we have focused on the lack of wage inflation as one reason 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. now we are dealing with a pretty strong 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 three basic ways to think about this, either you think the decoupling continues or you think it will reconcile with u.s. growth decelerating or asian growth accelerating.

which one is it? >> the u.s. decoupling continues, but it is a temporary phenomenon. as we get into 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 whether 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 variety of reasons. it is a matter of timing of when we recouple. while you are waiting, they are not going to blink, they have a lot of treasury supply. if we do not get the worst case scenario in the fourth quarter, 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? what if the rest of the world

recouples? 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 do you put money to work if that is your view? >> i think the higher rate overall being short makes sense. we this no man's land and in a game of 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. there is a perpetual upside that maybe we do not get the worst-case scenario in the trade front, and 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. this is a good point that george is making about issuance with the u.s. treasury as well. we are looking for three to maybe three and a quarter to the end of this year, and the trade is certainly 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 worst short in the world is the 10-year because of all the other reasons we have driven yields down 15 to 20 basis points. jonathan: the spread to u.s. treasuries, i think they are the widest since early 2016 when 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 dollar-denominated assets in which you are lending is costing you more. the benefit for the spread differential favors treasury right now 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? >> taking it one step deeper is with 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 continue to pick up pace. 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 a place to park their money that is keeping funding pressure at the banking level low. as we go forward, 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? the united states exporting volatility on several fronts? i have been saying it all week, it is our deficit, 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 point. i do agree that it is more of a 2019 story, but we are getting episodes of body blows to the market. you got it with the vix, italy -- anything that is kind of a spread in the risk contract tree is getting hurt. em is now in the focus, but we take that will have more. but it will not be the linear price action. jonathan: i keep hearing about this, and a lot of people are describing it as rolling bear markets. 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?

we keep getting these idiosyncratic problems which all add up to a bit more of a systemic problem. we are seeing problems right way in lots of different markets, but it is all about liquidity withdrawals for me. it is exposing a few of 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 that 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 rough few years as we go through this adjustment of 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 differentiating between strong names and weaker names in em at the moment. >> i totally 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 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 which could cause a contagion. but i do not see why they are not reaching out right now. jonathan: is it still just 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. it does kind of feed on itself. however, the market does have a tendency to create this gap risk. it is also august. let's not kid ourselves. i do think we have thrown the baby out with the bathwater on some of these em names. jonathan: we have seen this with btp's when it wasn't august, although a sudden where you expected liquidity to be, 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 we get into the fall, i think we will get a true sense

of where valuation should be falling towards. volatility should be higher. 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's bounced back. we are not seeing momentum in the big markets. if you look at vol, 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. united technologies got $11 billion in one of the largest debt deals of the year. that is next. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. 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 sold in bids. europe having a more difficult time. that primary credit market seeking its slowest week since the brexit vote, with just two deals amounting to one billion euros coming to market. finally, u.s. credit rolling along, united technologies getting $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. kevin, i spent this week and 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 it. 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 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 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 that of the total return, income is now the important component.

the capital return side of the story is not there anymore. the income 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 from the principal side, because we are going to see one more leg of the bear market. it will hit the principal side. you want as much cash flow as possible. jonathan: talk about this bond 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 its fifth iteration in the last three years. it lacks 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 are supposed to bring, and 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. if you go back and look at the data, this has been an investment-driven bond market. it has been more u.s. investors over foreign investors since the fed started hiking. we have had that shift. if we see foreigners coming back in, it would seem the fed is almost done. 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 as well, 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. the fact that turkey and russia are selling u.s. treasuries is not a big deal. only when you get into the top two or three sellers are you 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 towards 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 potential real slowdown in growth 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 junkest of the junkest has done what it has so far this year. kevin: if you are going to see that happen, i would move up into a higher grade in corporates. i would be four to five years max and try to get my back end healed out of tax-free bonds. jonathan: kevin giddis, george goncalves, and luke hickmore sticking with me. in the markets, twos, tens, and 30 year treasury'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 fed chair jay powell's speech in jackson hole. that is coming up next. this is "bloomberg real yield."

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jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up over the next week, greek prime minister alexis tsipras marks the end of bailouts. we get minutes from the fomc meeting. and fed chairman jay powell will speak at the annual central bank gathering in wyoming. still with me in new york city is george goncalves, kevin giddis, and 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 a major change from the fed. the fed is 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 is why 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 from jay powell so far. luke: no, it does not seem likely. maybe we will get a little bit of a chat about what they expect to happen with wage markets in the u.s. and why they are not really picking up, and why we are not getting much of an impact from that. if i was a fed chair, i would have that chat next week. jonathan: i have offered the ecb job up. 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? is that what we are going to see next week? >> we have obviously the sharing economy. all these other things making this recovery different than prior recoveries. i think the fed is acknowledging that. 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 it they are going to be concerned, that is the time, isn't it? luke: yeah, but 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. as said, i think if we see the two rate hikes we expect this year, we pushed through to the 10 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 for us here in new york city. we will see you next friday at 1:00 p.m. new york time. for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪ xfinity mobile is a new wireless network

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so you just pay for data -- by the gig or unlimited. saving you hundreds of dollars a year. plus, get $300 back when you buy a new smartphone. xfinity mobile. it's simple. easy. awesome. click, call or visit a store today. alix: commodities crumble. copper freefalls into a bear market as the stronger dollar drags down prices. some big winners. standards for shipping fuel change in 2020. bob reindall makes the case that a houston refiner will come out on top. gold is no place to hide. some hedge funds feel the pain. i'm alix steel, and welcome to "bloomberg commodities edge," 30 minutes focused on the hottest