jonathan: from new york city, 30 minutes dedicated to fixed income. this is bloomberg real yield." ♪ jonathan: fed chair jay powell forging ahead with interest rate hikes. president trump telling italy america is willing to buy italian debt. -- in the best-performing fixed income this year. fed speak in jackson hole. >> we ought to be moving towards neutral, which means three or four increases over the next nine to 12 months.

living in september and december is consistent with that path. >> i would rather not be calling rates accommodative right now. i think the whole structure of rates is lower and therefore we are at neutral or close to neutral right now. >> i agree the economy is doing well. i think two more rate hikes could be appropriate. >> the case for raising interest rates is pretty compelling. we have an economy growing above trend. we have low unemployment and inflation at or basically about 2%. >> there is no reason to challenge the yield curve. >> i would remind you, this is not our objective, to manage the yield curve. we use it as a signal for what it tells us about a policy path. jonathan: joining us now is international economic correspondent michael mckee. what have we learned from chairman powell today?

we are going to seek the fed raise rates in september. and probably december. he made the case their people arguing the fed should move faster because the economy is picking up speed. their people that make the case that with no inflation, affected move at a slower pace. he picked the middle route and says gradual rate increases is justified at this time. no indication he would change. theret of problems out that might influence the moves. it was this is what we are doing. jonathan: a beautiful jackson hole with michael mckee. think you for joining us. joining me in new york city is h,at horn back -- matt hornba subadra rajappa and!.

.-and james rogers subadra: the message was one of caution and gradualism. they have been hiking one. there is no rush to squeeze in the a lot of hikes over the coming year. i think they will be very cautious. if more hikes are warranted, and proceed as required. jonathan: matt, they are trying to link it back to jackson hole, wyoming. there is nothing that is changed from jackson hole and there is the difference i can see from chairman powell today from the month before. probably gotket ahead of itself trying to make up the story the fed needs to accelerate the pace of hiking. you can see the market is

disappointed he was not super hawkish. when you look at what he's telling the marketplace, he is saying we will gradually raise interest rates. there is no reason for them to change course at this point. jonathan: rob? our take on chairman powell's speech is he will continue with this gradual rate increase. he did not really talk about yield curve at all. he highlighted the difficulty of understanding economic data and how unemployment is related to inflation and how difficult it is to measure that. the yield curve is easy to measure. it's a good signal and he did not address that at all, although other speakers did. jonathan: where should he be looking? the fed funds rate? what is the most important part of the curve they get you the most information on what they should be doing? rob: they are very correlated,

but we have reached new flat levels today. if they continue with their steady rate increase, we would expect that to continue to flatten. subadra: i think the market with 5 3 either two ten's or 0's. it has generally been a good indicator of whether it will be a slowdown in growth. matt: there is an interesting study out a couple months back 's the fed said the two ten is not the best leading indicator. you were supposed to be looking at the front end of the yield curve. that does better job of foreshadowing the next recession. at the end of the day, the yield curves are correlated. we should be watching everything. jonathan: it seems there is correlation you can't deny. he is trying to say i don't

quite believe in the causation. there seems to be debate over that. matt: absolutely. it is listening to kaplan speech. he emphasized the long end of the curve is telling the growth will slow. look at what the fed is doing. they are hiking interest rates. of course the market is going to think growth will slow. it's amazing that they miss this very fundamental point about hiking rates leads to lower growth in the long run. jonathan: you keep the flatten er on? subadra: yes, for the foreseeable future. there is no risk for one away inflation. expectations have in type between breakevens. there is no risk. must have the dynamics where there is a lot of demand coming for the backend. it will be somewhat range bound. this dynamic with the flattening led by the front and will

persist for the remainder -- --nt end will remain for the will persist for the remainder of the cycle. rob: the flattener will continue. breakevens have been steady for a number of months. if the fed raises rates. matt: one of the things that was interesting about powell's's speech is he told us he was not worried about upside risk, yet he we continue to raise interest rates. that is a recipe for a flatter yield curve. we will invert some point next year. jonathan: they comes up again and again. it is not upside inflation risk. it is financial instability and financial excesses. is that what is driving the federal reserve chair? matt: i don't think so. if they were worried, they would be hiking more than once a quarter. it is unlikely we will get there. jonathan: when they move into the neutral rates, they are moving into the range with the

fomc considers neutral. what is neutral to you? subadra: it is hard to know. if you look at the fed's forecast, the committee members at of between 2.3% and 3.5%. we will not know until well after the fact where the fed funds rate is. it is safe to assume given the median expectations, it is summer between 2.5% to 3%. believe the neutral fed funds rate is probably below that. chairman powell today talked about how difficult it is to determine what that is. if we look at the risk-reward for the fed, it favors letting the economy run a little bit to try to find out where the neutral rate is rather than hunting for the neutral rate before you hit inflation. matt: one thing it picked up his

he seems to be more focused on the unemployment picture that the inflation picture. that is where i think it will probably leave him to determine where neutral is at some point. they need to see it flat line for a period of time. the unemployment rate still seems on a downward trajectory. they expected to continue to fall. they will wait until that stabilizes. jonathan: they talked about the removal of accommodation. they were about to consider what restrictive policy looks like. what does it look like for the market? matt: what the fed is telling the marketplace they are likely to do, in this is where the dot plot comes into play, is it is an important signaling mechanism for the marketplace. in september when they gather around the table and come up with their dots and release them to the marketplace, the market will look at the 2020 dots. where are the 2021 dots? that will be important in that regard. jonathan: several people got

excited about guidance around th balance sheet. time i: for the first would think in my career we saw reference from the chairman in the minutes calling for having to look at the balance sheet. i think that will be at the top of their agenda. what really changed is the fact we will go from the autopilot mode that has existed over the last two years to being more careful about what the size of the balance sheets should be. which of the excess reserves should be -- what should the excess reserves be? maybe it more and a larger balance sheet and higher excess reserves given the fact there is regulatory demand for excess reserves. those are the kind of discussions we will get from the fed in the fall. jonathan: subadra rajappa sticking with me alongside matthew hornbach and rob waldner

. coming up, the auction block. we will talk about that next. this is bloomberg real yield. ♪

jonathan: i am jonathan ferro. this is "real yield." we start in the united states. the treasury selling $14 billion as demand grows. the sale marks the highest heels for competitive bidders since 2009. in europe, daimler issued its second round of pound bonds, bucking a near 40% slump in sales and corporate debt sales

in 2018. notesillion of five-your -- five-your notes. cut salesnies have about 80% this year to 9.5 billion euros. this comes after the president's tax reforms removed an incentive to issue debt in europe. i want to get to a fascinating story. ever report this as president trump held italian -- told the italian prime minister the u.s. will help the country by buying government bonds next year. still with me is matt hornbach, subadra rajappa and rob waldner. everyone has read that story. they started by laughing. how can this happen? subadra: they can't. the u.s. government doesn't have the ability to go out and buy sovereign debt from other countries. even the federal reserve has a limited capability of buying

securities. they can't go out and buy equities. they have been in japan but the u.s. mandate is very limited. matt: the only thing i would say is if it actually happened, it would be a great deal of they swap back the currency. you can get great deals and italian debt these days. jonathan: rob, your thoughts on this? the interesting part of this story is quite clear. united states is willing to back italy at a time when italy is pushing europe to allow them to spend more money. rob: i don't think it will happen. what is ironic about this story is he is offering help at a time it seems does the fed tightening policy and the u.s. administration really pushing hard on this trade. we saw other stories about new tariffs. all of this will make it much more difficult for italy and for emerging markets. on the flipside he's talking

about buying italian bonds. typically the u.s. offers help through the fed put, which is far away from where we are now. it is interesting we have this dichotomy. jonathan: in the european bond market, i want to ask you how wide italy stays relative to germany. yields have really blown out and they stayed blown out. for most people the extreme risk, the base case is the increase in supply. is at your base case? rob: we have to get the budget negotiations in italy. i think they will be continued noise from italy as we come back from summer vacation. that is what is keeping spreads wide. we don't see the redenomination risk propagating at this point throughout the eurozone. the pressure is on italy. it's on italy. if it impacts other more vulnerable countries like spain,

that you start to think about redenomination risk. jonathan: the ecb has not finished qe, yet we have concerns about ept. matt: one of the focused areas will be through the summer commitment on interest rates. how can we talk about raising interest rates or even ending qe when you have these things happening in europe? people will give italy the benefit of the doubt for now. clearly spreads have widened, but next year it will be very interesting will be talk about ecb policy, how that will that is the situation. jonathan: the reports coming from germany that chancellor angela merkel is pushing for the top spot of the european commission to be filled with a german. i'm sure there are some bulls happy with the situation. matt hornbach, great to have you with us. subadra rajappa and rob waldner. a market check for you.

let's bring that up for you. 10-year yields down by four basis points. two-year grinding higher by a single basis point. coming up, a fresh china data on the global trade war. this is bloomberg. ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to get you up to speed on what's coming up through the rest of the week. trade data from the united states as we get insight into how the tariffs between china and the united states might be affecting the numbers. u.s. trade data coming on tuesday. we get some u.s. gdp on wednesday. look out for that as well, and

housing in personal spending data. that is dropping on thursday. a debate that's happened in the fixed income market throughout 2018. two pockets of fixed income have outperformed. high-yield and leveraged loans. leverage loans have been outperforming high yields. i was happy to catch up the two people a very different sides of the trade. we asked them whether either side has room to run. listen to what they have to say. loanthink the leverage trade is not because you will make a lot of money. you will get decent income. if you are wrong and think stern south, the protection -- think stern south, the protection will be very significant. the supply of loans has been somewhat of a problem for you see lots of issuers coming into the marketplace who would not

have come in normally. if you have an actively managed fund, in a down cycle they will not really this thing was themselves. >> how did that work out in 2008? not very well. loans were down 31%. we are seeing the pattern we have seen over the last few years. companies that should be coming to the high-yield market and 6%,ing at six or seve -- 7%, a percent. -- 8%. jonathan: going up in quality is not what you think it is? 2008.mentioned the ultimate in 2009. it came back a lot faster. that is precisely the point. you can have a drawdown but because loans are senior and because you have significantly lower losses in good loans

-- jonathan: the high recovery rate? companies that are issuing the loan markets that might not be able to yield in the high yield market at all. >> i don't understand that argument. they killed loans by 1000 basis points. two years ago we debated this point hundred 10-year was below 1.5%. let's not cherry pick. this is the second year out of 13 they have beaten high-yield. what are they done since two years ago when the 10-year was under 1.5%? loansield returns 7%, 4%. we should not cherry pick the last two years. let's go back to when loans -- we had downturn. the driver of the downturn was

problems in the high-yield market. it's a time to recover. the performers of the high-yield market in that timeframe was significantly worse in the performance of the loan market. if you're not going to cherry pick the data, let's not just take the last two years. it's also fair to say the most ardent high-heeled investor -- high investor today surprised by these performances of high yields this year. it is clear in the market. high-yield is relatively nice. i think the debate between loan in high-yield is somewhat irrelevant for this reason. the real opportunity is not between picking between high-yield and loan. the real opportunity is the emerging market local debt. if i had money to put to work today for significantly better returns, it would not be because i wanted to devote money to loans or high yields. it would be buying emerging-market local debt which

is extraordinarily cheap at the moment. >> that is something we can definitely agree on. jonathan: i finally caught you on the right side. >> get is relevant. the past year loan set at step edged up.ave dge there is a structural disadvantage in the loan market. you have no upside like you have a high-yield. jonathan: we will get to how you part of your position in the u.s. -- whythink most people you think most people are underweight? >> european high-yield, bank loans, emerging-market debt. those are highly qualified equity markets. there is nothing in the portfolio for a rainy day. two areasa debate on that outperformed this year. leveraged loans outperforming

high-yield. two people i have a lot of respect for. i can tell you because i was there that they shook hands after that. that does it for us. we will see you next friday at 1:00 p.m. new york time. from new york, this is "bloomberg real yield." this is bloomberg tv. ♪

will the united states impose sanctions on russia over the nerve agent attack on a former russian spy and his daughter in the u.k. they will include restrictions on foreign assistance, arms

sales and denial of u.s. government credit. the sanctions will take effect on monday. a former director of the u.s. centers for disease control and prevention has been arrested in new york on a charge of sex abuse. friedman, a former new york city health commissioner was arrested this morning. he is charged with groping a woman at his home last october. australia's new prime minister scott morrison is pledging to bring stability to the nation after another bout of political upheaval some malcolm turnbull moved in an internal coup. turnbull came to power himself in a 2015 party coup. determineds a insurgency from a number of people in the party room and