jonathan: from new york city kanaan jonathan ferro. this is "bloomberg real yield." ♪ jonathan: coming up, treasuries gearing up with higher rates, it a one-month t-bill breaking 2% and emerging-market central banks tighten policy, russia's the high-grade and 10 years since the lehman collapse to postcrisis market have a liquidity problem? is the story of divergence becomes a story of convergence. quentin snider euro diversions. >> united states and the rest of the world. >> in the u.s., we are not

taking risk off quite yet. >> 2019 will be a year of convergence. >> 3% in the second half of next year of up to a half. >> are going to see convergence. >> u.s. economy is performing very well. >> convergence and earnings. >> still looks very strong. what, theu know economy looks great. jonathan: a full house with me in new york. gershon distenfeld. subadra rajappa. and krishna memani. your thoughts on the convergence divergence arguments. ms rajappa: the divergence seems to have continued. my concern is if you listen to

the ecb this week, they are pretty much on hold for a good portion of next year, qe is anticipated to end sometime by the end of this year and what that really leaves them with is very cognitive policy, in contrast, you have the u.s. raising rates four times over the next year, which makes it very hard to time monitor policy if the u.s. tries a slowdown for the later half of the year's divergence could stay on a little longer than we anticipated. mr. distenfeld: i agree. we are forecasting the six-time until the end of 2019. makee short-term county continue to see divergence. if the framework works out, convergence/divergence won't go in, all of this will

the tank if the fed tightened six times and the ecb doesn't do anything because the dollar re-strengthen to a level that would be of suitable for the global economy. at the end of the day, the conversation about divergence has to come down to economics under metals. the markets are diverging because economic fundamentals are diverging and until they start converging, there is not going to be respite. doeseal question for me is this convergence that we are looking forward to, does it come about and more importantly, if that convergence comes through what? with u.s. growth slowing down of the rest of the world growth meeting up. i think that's a very important question. jonathan: where do you answer that question? mr. memani: i think the likelihood that emerging markets and to some extent european growth is on the back of emerging market growth, the likelihood that emerging market growth accelerates in a meaningful way at this point unlike 2015 and 2016 is very unlikely now.

if there is going to be a convergence, it will have to come from u.s. growth slowing down. we saw no evidence of that just yet, i'm going on manifest itself, but we will see. one of the pain trades off of this convergence divergence debate has been the spread between tens, germany, the united states, it's been wide, wide, wide. i spoke to earlier this year who expected this spread scenario reportedly with some knowledge -- was some leverage. do have any confidence that's going to narrow? ms. rajappa: i think ultimately the fiscal stimulus really caught a lot of markets, you have 4% gdp growth for the third quarter and we are tracking the second quarter and a 4% for the third quarter.

that led to the strengthening of that led to the strengthening of the dollar as well as higher treasury yields. and bond yields are still stuck at 20 basis points. mr. distenfeld: in the short-term the story is the relative difference in economic outlooks. the u.s. is really strong and we might have a dollar rally to the point where it's problematic for growth but that is not the main concern of the fed at the moment. if you look at the longer term, you look at deficits that continue to be a problem in the u.s., and running very loose fiscal policy at some point, that's going to -- the chickens are coming home to roost on that and the dollar might actually suffer as a result of that. in europe, we can argue about the exact timing, but you have to expect rates to go up in the long run. that's also unsustainable. for a five basis points on 10 year bond yields is not sustainable. jonathan: you touched on something we talked about earlier this week. scenario, ace a risk-averse scenario where treasuries are the risk-free

assets that people been for in a drawdown and risk assets? we really face that scenario? mr. distenfeld: we've been arguing forever that level matters. how much can we rally starting from 3%? we saw that, we got to 1.5% and that could happen in the short-term. it's much harder to see that the long term. but yes, in the short-term, when you have stress, people are going to go to safety. safety is going to be the dollar at treasuries in the u.s.. mr. memani: janet yellen said the fed should prepare themselves for a rerun of zero rate. all thels you policymakers are thinking. today, because of fiscal stimulus, everything looks hunky-dory in the u.s. and will probably grow at a rapid clip. a year from today, two years from today, if that scenario plays out in the fed tightens six-time in 2019 expecting u.s. growth to continue at this level

is preposterous coming cannot sustain itself on the curve would be totally inverted and the dollar would be meaningfully stronger and you have a correction everywhere. in that environment where treasury rallies and rally in a meaningful way. two more times this year. i don't agree with that. policymakers also say the long-term average rate should be about 3%. another six times will take us to a little bit above that is not necessarily unsustainable. it might be a problem for the rest of the world of the u.s. could continue to grow even if that kind of level. that's the fed raises want to twice this year and we go into recession 19, 20, got a framework very we are calling for mental slowdown in the second half of next year and 2020. maybe that gets pushed out a little bit but that's an eventuality and this is not just in our forecast. if you look at the fed forecast, they have a slowdown in growth as well in the coming years. in the forecast, they can't show

you an actual slowdown or rate cut or recession, but that's kind of what the consensus seems to be, a slowdown in two years. jonathan: 2020, i keep hearing about that. when has 2020 come from? ms. rajappa: the way look at it, we're already at the longest -- by the middle of next year, this is the longest business cycle and i'm not saying business cycle die of old age, but you are starting to get to a point where you are reaching capacity and you are at full employment. the rates market especially is poised for protection. you are at 3% yield on the market is not only to price in a rate cut yet. things can't just a that way for the for the seeable future. -- for the foreseeable future. around 2020, some the us to change. jonathan: it's a shallow recovery and it could go on a lot longer than people think. mr. memani: absolutely and that's our central theme. it's not 2019.se

from a forecasting horizon standpoint, it's very convenient. the real answer is it is contingent on the fed tightening meaningfully, that's four or six or whatever we say the number is in 2019. the likelihood, that we get into a recession increases meaningfully for 2020. having said that, my expectation still is that this ends up being a much longer cycle than any of us has ever expected for one simple reason, which is inflation hasn't manifested itself in a meaningful way and until we see that, betting against the cycle has been a wrong bet. it's alreadyd: been a longer cycle than almost any other cycle, but it is living through the real answer. in 2016, we were saying 17. we realize we are hopeless it forecasting in the

short-term, within go ok then we have some inside a year or two from now. phenomenon,in many the maturity walls or the high-yield debt comes up every time. look to or three years out. it's a natural thing. your basic argument is this economy can tolerate higher ratesat the that krishna thinks it can't tolerate. eating the economy can tolerate higher yields and a much higher just right. -- interest rate. mr. distenfeld: the real fear is on over going to have a recession in 18 months or not. the scary thing is one of these are to see growth slow at the same time inflation is creeping up area what is the fed going to do? they already said they would rather air -- err on the side of easing rather than on doing too much to keep economies going. you might have to err on doing too much to stall that growth so you don't have an inflation pressure berlin -- inflation problem.

coming up onthan: the program, the auction block. aslian bonds under pressure the new government looks to formal budget. this is "bloomberg real yield." ♪ ♪

jonathan: arne duncan barrow, this is "bloomberg really old." supply for this month -- "bloomberg really old." yield." largest batchcond of those duration since 2010 in

the 10 sale. the primary dealer award was the lowest since january. in europe amid italy's budget negotiations, on -- auctions at 30 or debt all drew weaker demand of the seven-year sale bids bids worth 1.28 times the offer size. italy very much a topic of discussion of this week's ecb, with mario draghi who expressed concerns over the country's new government. >> words have created some damage. an interest rates have gone out for-- have gone up households and for firms. muchf this hasn't created to other euro area countries. it's remained pretty much an italian episode. still with me, gershon distenfeld, said roger obama --

so watch your job -- subadra rajappa. and krishna memani. we have the ecb meeting this weekend and we didn't get a whole lot of specifics on what they are going to do on the policy fund that is new that we didn't already know. they're going to lower the pace of asset purchases in october and they are anticipated to end qe at the end of this year and normalized policy sometime in the middle of next year. they are telling you we are aware of what's happening in italy but it's not really a policy concern as of yet because the rest of europe seems to be doing pretty well. --jonathan: a stat came from your team the u.s. high-yield has outperformed global high-yield for the most since 2002. is that really true? the thought that the gap, you're just talking

about corporate debt. u.s. high-yield market has done better than almost anyone would have expected. the real underperformer has been emerging markets and we know that's a story name and last time we agree upon that's probably where the real value is. you have to have a stomach for it because there is going to be some volatility but that's really under performances, that's what value seems to be in the marketplace. jonathan: your argument seems to be diversify away from u.s. high-yield. it might not be right in the next month or two but if you look or evaluations are and where we are in the cycle in the u.s., it makes sense pattern of that's convergence or divergence, in your limits, but essentially in all likelihood you are going to see stuff outside the u.s. over the next 12 to 18 month outperform. jonathan: that is convergence. i'm glad to see him talk about getting away from high-yield. continue to believe the best value in credit is really in emerging markets because they

have corrected in a meaningful, meaningful way. the spread between u.s. high-yield and emerging markets is probably the largest it has been in a long, long time. having said that, there's going to a lot of volatility and it's going to depend on the convergence working out the right way. jonathan: can we get more polarization within the em complex? mr. distenfeld: absolutely and that's important. e.m. is to complete the different markets. for 75% of the country or so you haven't seen that. -- it hasn't done as well as but has on underperformed. your talking about argentina and turkey into a lesser extent result in russia and they are all things that have to happen, they are all policies that have to be put in place in the dollars were to be a big story. jonathan: give us a flavor of what you have been up to. mr. distenfeld: not a lot. we went into this year positioned with quite an bit in

the u.s. and we added into it. would you think argentina is particularly interesting and at the end of the day, their support from the imf, you have to your local bonds yielding 60% and the odds of that outperforming over the next couple of years is very, very high. mr. memani: emerging markets is the best value, if you buy anything at the margin, that's where you look at value. let's be clear about one thing from that emerging markets not just knowledge and omitting debt, it's local currency as well and it underperformed u.s. markets in a meaningful way across the board. yanis axis substantially weaker and therefore a tremendous amount of value. jonathan: stick with it, krishna memani and subadra rajappa. and gershon distenfeld. yields higher at the front end by seven basis points.

2% onhighs on a two-year, a one-month bill in the treasury market. have a think about that come out for basis points, tucson 30's. still ahead, the final spread of the week from the bank of japan on the 10th anniversary through the weekend of the collapse of lehman brothers. this is bloomberg real yield. ♪

jonathan: i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." leverages have been building up. >> we are seeing the bond bubble because bradley yields are multiyear lows. jonathan: behind the curve to some extent already. >> even the way the fed to find it, they are somewhat behind the curve. >> trade is getting longer in the tooth.

jonathan: i'm jonathan ferro, this is "bloomberg real yield." the 10 year anniversary of the collapse of lehman brothers, plus a summit in korea and decision from the bank of japan cannot and economic data in the united states and across europe as well. with me to discuss is gershon distenfeld subadra rajappa. ,and krishna memani. 10 years looking back, i want to look forward a little bit and think about those crisis how this market has changed.

a lot of people point to a liquidity and what should be a very liquid market, treasures. as liquidity change in the treasury market? really see anyu change in liquidities, still feels looks like a very liquid market. where things are fundamentally changes on the regulatory side. have tolike ourselves subject to leverage issue requirements that constrain our balance sheets. we are less willing to warehouse treasuries like we used to in the past. to a littleeaving bit of a liquidity in the market. jonathan: people point to that sleepy day on october 2014 when treasuries have this huge move out of nowhere and a lot of people think about that moment and think about what could happen on a really, really bad day when money floods into treasuries. what is october 2014 mean to you and can you really tied back to

the regulatory regime can post crisis? mr. distenfeld: that is an important factor list of question that the lazard taking less worse for the balance sheet. the buyer might be walmart bonds of the sellers rising wireless. there's often that ten-year treasury bonds, there's a buyer and seller. there's certainly much more matching of orders, but that to if youe the market get one-sided trade one way or the other, you could see very sharp movements. mr. memani: the picture for liquidity really comes through in off the run treasuries than a dozen on the run treasuries and then the picture has certainly deteriorated. whether that's a bad thing for the markets, i'm not so sure. why should we be making really wouldn't market -- really liquid market cybersecurity, how does that help us?

the point is the corporate market is a good one of innovation the corporate markets from liquidity standpoint isn't the dealers and anything of that sort. it's really that etf's. etf's are providing countercyclical liquidity that you would not normally get because of the aggregation of the risk. you can get speculators to take the other side of all corporate investors looking to dump corporate bonds. the investors move one way because they are buying all of them were they are selling all of them. normally because of the disaggregation, people have a challenge with availability of etf's, that is sort of helped in a significant way. jonathan: a final word on that come a shift passive. mr. distenfeld: a lot of credit etf's are really passive. they do have sampling, they can't buy every single bond in the market. the second thing is it's helping from a liquidity perspective it's been a disaster for investors. gingerly high-yield.

you look at hyg, j and k, they woefully underperformed actively managed high-yield funds and there's this perception the going passive beats active and that may be true in segment of equity market but it's the exact opposite. years sincehan 10 the things that come to be an 85% of actively managed funds net of fees have beaten these things. really good final point i will take you did ask you quick final questions on this program. get ready. do treasuries keep their risk many getting characteristics in the next -- risk mitigating characters six in the next downturn? mr. distenfeld: yes. ms. rajappa: yes. mr. memani: absolutely. jonathan: have we seen this cycle wives on treasuries versus bunds? mr. distenfeld: not even close. ms. rajappa: no. mr. memani: not close, but we're getting there. jonathan: i did this just for you, this final question is for

you and you don't have to play if you want to, subadra. u.s. high-yield? mr. distenfeld: tied. u.s. high-yield by a wide margin. ms. rajappa: pass. mr. memani: leveraged loans. jonathan: we will do that another time. rajappa, gershon distenfeld and krishna memani. we'll see you next friday at 1 p.m. new york time, 6:00 p.m. in london. this was "bloomberg real yield." this is bloomberg tv. ♪

mark: i am mark crumpton was first word news. officials with the national weather service in the federal emergency management agency warn residents in the carolinas that hurricane florence remains a threat, despite downgrading to

category 1. florence made landfall near wrightsville beach, north carolina as a category one storm and is now carrying maximum sustained wind of 80 miles an hour. more than .5 million people in the region are without power and they face at least another day of heavy rain and wind. >> i do want to emphasize that this is only the beginning. florence is a very slow mover and will continue to track along the north carolina and south carolina coastline for the next 24 to 36 hours. it will not get to columbia, south carolina until monday, midnight morning. says iema's jeff meyer hope people blot -- brought flood insurance because you're going to need it for this event. in the philippines, a typhoon has picked up speed as it heads closer to land, more than 5 million people are risk from the storm