30 minutes dedicated to fixed income. this is bloomberg real yield. coming up, u.s. strength in the face of fragility elsewhere. up a messy week for emerging markets. gripped by bearish sentiment. looking ahead to fed share. the speech in wyoming. we begin with a big issue. the u.s. decoupling from the rest of the world. >> the u.s. right now is enjoying exceptionally strong growth. >> it is part of the divergence

be one of the major themes for markets and the global economy. >> u.s. is delivering twice the earnings growth of the rest of the world. the d linkage persists. >> it is hard to make the argument against equity. is continuing to break out relative to the rest of the world. -- the pricesnies are blowing up for no other reason other than the fact that the story sounds sexy. that would be a totally different matter. economy,ou look at the in terms of providing all this fiscal stimulus that is going to continue. >> the u.s. is a policy led growth spurt. the rest of the world, it has been a combination of ad hoc issues. >> it has longer to go. the pace is more than sufficient. >> joining me is kevin. head of fixed income. head of u.s. race strategy. and coming to us from edinburgh. aberdeen standard investment.

let's begin with you. can this continue? >> i'm not sure. i think that if you look at the treasury market in general, with economy this strong, we focused on the lack of wage inflation as one region to buy the long end of the market. now we are talking about a stronger dollar. the two big misses in the the 10t, one is that years going to three and a quarter, three and a half. two is the strength of the dollar. they thought it would be short-lived, now we are dealing with a strong dollar against him bunch of major currencies. i don't know if that is a short-term or long-term event. either way, if it was not for that you would be a 3%. >> three basic ways to see this. continues or it reconciles with u.s. growth decelerating. european aging growth accelerating. which one is it? >> the u.s. decoupling continues. it is a phenomenon as we get into next year and the second

half of next year. i think that decoupling will have stop. this is just forward growth. not long-term structural change. >> it raises the question whether you are in the coupling side of the story, and whether you want to actually play that and apply it to trade. a wider spread between the u.s. to your spread. >> the u.s. can continue to couple for a variety of reasons. all points were mentioned earlier. it is a matter of timing when we re-couple. have it are waiting, we in play, not going to blink. a lot of treasury supply. what if we don't get the worst-case scenario? >> there is a very sentiment, don't believe that it is sustainable. you press people. they will push back and say that this is temporary growth story. what if it is not and what if when we are coupled, that is where the pain really lies? a week discussing this at debating pure desperate -- express that in the market. what is the trade? >> i think the higher rates

overall being short makes sense. we are in this no man's land in the tug-of-war between 280 or 3% on the 10 year. stick to the third quarter september where everyone is back in their seats. it is not going to be that perfect. a potential upside that we don't get the worse of the trade front. you can easily break free. >> i think it happened. youndered to what extent think we have been by issues such as turkey per by issues such as the train discussion where yields on the long and -- long and have been cap by sentiment issues more than anything. >> i agree. i think this is a good point he is making about issuance for the u.s. treasury as well. three.looking for maybe 3.5. the trade is certainly the short treasury. longer dollar. almost everything else. i'm not sure if i want to be a player spread between the u.s. and other parts of the world.

so much else going on. being u.s. centric i think there is plenty there already. >> it makes sense. i think it comes back to the very basic, unless we see the weaker dollar, unless we see some form of an asian, most likely wage inflation, it is not going to go up a whole. the worst short in the world is the tenure for all the other reasons that we have driven yield back down to the 20 basis points. >> let's look at the spread. the treasuries. versus the and right now. spread to u.s. treasuries have been wider since 2016 where we had a real concern in china. emerging markets. does that differential. add up to you? back to the strength of the dollar. as creating this differential. why are treasuries more attractive today than they were three months ago? the dollar is stronger. that is there is elitist in the economy. been a flipside.

emerging markets are weaker because of the strength of the dollar. those dollar-denominated assets is cautioning you more. the benefit for the spread differential favors the treasuries more than all year long. >> it is an important variable right now. >> i think taking it one step deeper is funding conditions around it. what the fed is doing with their balance sheet, people want to focus on being very technical. liquidity is going to continue to pick up pace. this funding aspect dollar, you are not seeing it the way it should be. taxly because of the reform. we have had a lot of dollars coming back home to the u.s.. they are finding a place to impart their money that is keeping funding partials at the banking level low. as we go forward, the next iteration will be the funding aspect. not just the spreads widening. >> are we seeing that already? the united states exporting volatility.

i have been saying all week it is our deficit, your problem. our currency, your problem. our monetary policy, your problem. at somewill come back point. i do agree that it is more of a 2019 story. we are getting these episodes of body blows to the market. anything that looks like a spread in a risks -- risk contact trade. we think we will have more of it. it won't be the linear price action. it will come in fits. >> i keep hearing about this. a lot of people describing it as rolling bear market. is that how you would describe it? european banks in the bang market. -- bear market. is that what this is, a rolling bear market? >> it does feel that way. we keep getting these idiosyncratic problems. which all add up to a bit more of a systemic problem.

certainly, we are seeing problems right away. lots of different markets. it is all about liquidity withdrawal for me. it is just exposing a few of the tensions and troubles around the world, which are coming out. they are coming out aggressively. blowup.in the there is nothing to stop it happening. hadget a rate that we have over the last two or three weeks, there is very little to stop it. it in some ways is quite nice. lots of things we can do. it is going to be a rough few years. this adjustment of not leaning so much on central banks. >> let's talk about em. bloomberg of hilly -- opinion columnist. take a listen to what he had to say. overexposed to turkey. i would reduce exposure. turkey is trying to rewrite the theis management chapter in playbook for emerging markets. it is trying to go without

interest rate hikes. it is trying to do without the imf. that is hard. it is not impossible. it is hard. the game he back in would be loving what is happening right now because the market is distinguishing differentiating between the strong names and the weaker names. i totally agree. i think that in the case of turkey, they are ignoring all of the signs that are in front of them. with the idea of keeping growth alive. 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. that whyee that, that, they are not reaching out right now. >> is it still idiosyncratic? >> i think the fact that these are large reasons within en that are affecting other large regions, we have brazil's elections coming up as well.

a key focus. idiosyncratic. really big locks of space. of see onnd of peon it itself. have thrownhat we the baby out with the bathwater on some of these em names. >> we have seen this where it was not august. suddenly, liquidity rates was no longer there. with something like dollar lira, it should be a liquid currency. the spread was this wide through this week. this is happening outside of august. >> this is true. i think it exacerbates it. i think we will get a true sense of where evaluation should be falling toward. volatility should be higher. look at overall market conditions. pre-much unchanged. treasury does a lot of -- -- third euro deed -- did touching low. we are not seeing momentum in the big markets. it could evolve.

it has not gone away. markets are expecting more volatility in the fourth quarter. >> george. alongside kevin. and luke. up, the auction block united states now borrowing $11 billion for mark well. one of the largest debt deals of the year. that is coming up next. this is bloomberg real yield. ♪

on jonathan ferro. this is bloomberg real yield. i want to add to the auction block. we start in turkey. a currency crisis. turkey selling $60 million in two years. 25% yield attracting over twice the amount sold.

a more difficult time. primary credit market seeking its slowness -- seeing its slowest week since the brexit vote. finally, u.s. credit rolling along. technologies borrowing $11 million from its colons acquisition. year portion saw yields dropping 30 basis points between pricing and the auction. still with a, kevin guinness. george. and luke. kevin, i want to begin with you. they call out with pimco. talk about how they turned caution defensive in one of the big funds. my question is i hear this a lot about turning cautions and defensive. then i reconcile that with what is done really well. fixed income. how do you make sense of that? >> i think whatever they say about caution in -- and defensive is how is happening in the current market. especially with the long end of the curve.

investors are willing to take a lot more credit risk. it has been a yield play for the last two years anyway. you offer me a twitter 5% for two years in turkey. the reason yous want get cautious and defensive. convertibles doing really well. triple c doing pretty well. relative to what investment. it is now the time to get defensive and go elsewhere. and some money. >> yes. but really slowly. we have been selling rallies rather than buying beds. the process is going to continue doing it. a lot of the trades at works the last 10 years are running out of steam. the long financials trade versus everyone else. that feels like it is getting very old in the teeth. yes, but slowly. i spoke to pimco. and blackrock. the totalhad said of return, income is now the important component.

the capital return side of the story just is not there anymore. the income component is so much more dominant. assets are always in high demand. overall, income to offset the losses for principal side, we will still see one more leg of this bear market. which will hit the principal side. you're an loss, as much cash flow as possible. it is an hibernation. >> i don't see it. , iteration.its over the last few years. it is -- it lacks the principal legs it needs. that is inflation. primarily wage inflation. before, when you throw a stronger dollar on top of it, you are going to create demand locally. that is why every auction is oversubscribed and better than

the last one. it will continue to be that way until we see a change of prices. where is the inflation the terms were supposed to bring. where are all these other things that we had thought was going to -- we are talking about this almost to the present of exclusively looking at u.s. markets. externally, foreign investors, are they starting to allocate a little bit more into the united states? there was a lull for the better part of this year. foreign investors were not participating. look, thisack and has been a domestic driven bond market. most of the buying has been more u.s. and based -- investors over foreign investors. we have had that shift. if we see foreigners come back in, that would be -- they feel like the fed is a most done. i'm not sure we are there yet. we still have a way to go. yields are getting high enough that there could be a detraction from foreign capital. the dollar story as well. i'm not sure it will be as before. been domestically

driven on the buy side. with the lack of selling from china and japan is the reason why we are not so much higher. the fact that turkey is selling u.s. treasuries, russia is selling treasuries. is not a big deal. only when you get into the top two or three holders are you going to drive sellers hire. >> i want to ask important question. high-yield -- cycle, yourthis view on that 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 bearish, we would be selling u.s. high-yield here. it is a case of rebalancing your portfolio. stuff to highlity leverage the addition that a lot of these companies are in.

is that 2020 story of hitting attentional real slow increase. it is a trade which we will be doing all next year. be a lot ofto people struggle with the idea that high-yield -- when the junk is done what it has already done so far this year. >> i think that play is about done. you are not getting paid for the risk. if you are going to see that happen, i would move up into a higher grade. four to five years max. kevin, sticking with me alongside george. and luke. markets.with me in the through this week. to's come tens. shaping up as follows. it has been a snooze at the front end. still ahead, the final spread.

hole, this jackson is bloomberg real deal.

is bloomberg real yield. time for the final spread. coming up, the greek prime minister marks the end of bailouts. minutes from the meeting. fed chairman jay powell will speak at the annual central bank in jacksonville, wyoming. still with me in new york city, i'm very pleased to say, george of nomura, alongside him is kevin guinness. luke joining us from edinburgh. i have not heard many people talking about jackson next week. seems to be quite downplayed. >> i think people would view me

as being academic. not worried about a major change. it would take a lot for them to change. speculation that perhaps you would see some acknowledgment. i think that is why we are mixing what we see next week. >> the federal reserve is going to respond a times into international situations. i see no sign of that. >> it does not seem likely. maybe we will get a little bit more about what we expect from wage markets. why we are not getting much of an impact from that. chair, the chat i would have next week. the ecb as well. kevin guinness, your thoughts. a lot of people focused on that.

asking the question, as to whether they might pause balance sheet runoff. how can we understand the method to understand what is the appropriate level of the balance sheet? >> i don't think they are going to stop or pause the normal runoff of the balance sheet. they have been working on this for the last 14 to 16 months. you are probably one third of the way of where you probably should be. when you think about what the balance sheet is supposed to end up as. continuehat they will down that path. there is no reason not to do that. the fed has been awfully quiet. as you mentioned. they have been quiet in general this week. means going if that in -- there is nothing that is cannot of the jacksonville. other than the expectation from almost everyone, maybe 95%, that they will raise rates in september. the better story is what that means afterward. what will happen after that? >> the time of the speech is

interesting. the monetary policy in a changing economy. is this time different? a -- the sharing economy. things that are making this recovery different. the fed is acknowledging that. it could very well lean on the academic side. but not impart any new information. >> i'm sure the market will find something in it. spread, 24 basis points. 25 basis points. 23 basis point. we get into that point. they're going to be concerned. >> i think they are not particularly concerned. minus one or minus two. that does not seem where going to be getting there anytime soon. i think if we see the rate hikes that we expect to see, we push the 10 years. we could still be 24, 25 basis point. >> a good point.

good to see you. standard investments joining us from edinburgh. alongside new york city. and george. from the more appeared that does it for us in new york city, we will see you same time same place next friday at 1:00 p.m., 6:00 p.m. in london. this was bloomberg real yield, this is bloomberg tv. ♪

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