>> from new york city, i'm jonathan with 30 minutes dedicated to fixed income. ♪ >> coming up, treasury gearing up the higher ranks. emerging-market central banks policy russia, the latest high grade. and 10 years since lehman collapse in the post crisis market. with the big issue, a story of the virgins becoming a story of convergence. >> it has been a year of divergence. >> it's been the u.s. and everything else. >> we are not taking risk off

quite yet. >> 2019 is going to be a year of convergence. >> we are going to see convergence and central-bank policy. economy is performing very well. >> the next couple of quarters, still a very strong. what, the know economy looks great. >> here in new york, cohead of fixed income, head of u.s. rate strategy and chief investment officer and head of fixed income. let's start with you. your thoughts on that convergence-divergence argument that is the price right now. year ing into this thought that yields would trade much more in line with each other but the divergence instrument continued during the course of the year. my concern is that if you listen to the ecb this week, they are

pretty much all hold for a good portion of next year. qe has anticipated to end sometime by the end of this year. what that leaves them with is very accommodative policy. in contrast, you have the u.s. raising rates potentially four times. that's going to make it very hard for the ecb to eventually tighten policy. so this divergence could actually stay on for a little longer than we anticipated. >> i probably agree with that. it's very clear they are going to be on a very slow path. atit doesn't going into more least until the end of 2019, at least in the short term, you might continue to see divergence. out, the framework works then convergence-divergence won't matter because all of this will go in the tank. that titans six times next year and they don't do anything

because the dollar was strengthened to a level that would be unsustainable for the global economy. at the end of the day, the conversation has to come down to economic fundamentals. the markets are diverging because the economic fundamentals are diverging and until they start converging, it's not -- there is not going to be risk by -- respite. the real question is does this convergence and we are looking when does it come about, but more importantly, that convergence comes through what? with the u.s. growth going down, or the rest of the world growth speeding up? i think that is a very important question. >> what's u want? to some extent european growth is on the back of emerging-market growth. the likelihood that emerging-market growth accelerates any meaningful way at this point i'd like 2015 and 2016 is very unlikely. be aere is going to

convergence, it will have to come from u.s. growth slowing down. we have seen no evidence of that yet, but we will see. >> let's get to the rates. germany andetween the united states. it's not worked out. do you have any confidence that will narrow anytime soon? >> not really. i think it's ultimately the fiscal stimulus. % gdp growth for the third haster, and i think that led to the strengthening of the dollar as well as a treasury of 3%.

borneo is still stocked. the storyshort-term, is the relative difference and economic outlook. the u.s. is really strong. we might have a problem with the dollar rallying to a problem with global growth with that is not the main concern at the moment. the main concern is full employment, inflation starting to creep up. however, in the longer term, deficits continue to be a problem, something that we don't talk much about. and a loose fiscal policy, at some point the chickens will come to wrist on that and the dollar might actually suffer as a result. aboutope, we can argue the exact timing, but you have to expect rates to go up in the long run. that's also unsustainable. 45 bonus points is not sustainable. >> you touched on something we've talked about this week. scenariolly face a where treasuries and the risk

reactor -- >> we have been arguing for ever that level matters. how much can we rally starting from the 3%? we got a couple. that could happen in the short-term. much harder to see that in the long term. you have stress, people are going to go to safety. safety is going to be the dollar, treasuries in the u.s.. on the tape today basically saying that the fed on to prepare themselves for a rerun. that tells you have policymakers are thinking. today, everything looks hunky-dory in the u.s. and we will probably glow -- grow at a rapid clip. but a year from today if the thatrio plays out, tightened six times in 2019 expecting u.s. growth to

continue at this level is preposterous. it just cannot sustain itself. inverted, andd be the other correction everywhere. and if we have a, that's an environment where treasury rates rally and rally in a meaningful way. >> right, two more times this year. i don't agree with the -- policymakers also say that the long-term average rate should be about 3%. another six times would take us a little bit about that. for the restroblem of the world, but the u.s. can certainly continue to grow. >> we are in the camp that the ses once or twice this year and then we go into a weession in 99 -- 2020 -- are calling for a meaningful slowdown in the second half of next year into 2020. that's an eventuality and this is not just in our forecast. if you look at the federal forecast, they have a slowdown in growth as well.

they can show you the actual .lowdown or a researcher about 2020.aring on this program, on other programs. why is that the buzz word right? the way i look at it, by the middle of next year, this will be the longest business cycle. i'm not saying that business cycles die of old age, when you are starting to get to a point where you are reaching capacity constraints, you are at full employment. the market is priced to perfection. your at 3% yields for the seeable future. things can't just stay that way for the foreseeable future. i think around 2020, something has to change to change the trajectory of rates. >> a very shallow recovery. it could go on a lot longer than people think. >> absolutely, that is the central theme. it's 20 because it's not 2019.

from a forecasting horizon, very convenient. the real answer, it is contingent on the fed tightening meaningfully. whatever we may say the number is in 2019. the likelihood that we get into a recession increases meaningful fully -- meaningfully. my expectationt, still is that this ends up being a much longer cycle than any of us ever expected for one simple hason, which is inflation not manifested itself in a meaningful way and until we see that, betting against the cycle has been a wrong bets. longeras already been a cycle than almost any other cycle. i think the flip answer is the real answer. back in 2015 we were saying 17 is the key. the cynic in me think that once we realize we are hopeless and forecast in the short-term, we think ok.

but then we have some insight maybe a year or two from now. the high-yield that comes up every time. it's just a natural thing. >> i was going to say that your basic argument is that this economy can tolerate high yields but the higher rate see things and can't tolerate, you think it can tolerate much higher yields at a much higher interest rate. >> i do. the real fear -- i don't know if we are going to have a recession or not. we may, we may not. the scary thing is what if we start to see growth slow at the same time inflation is creeping up? the fed has always said they r on the side of doing too much to keep economies going. i think it has to work the other side as well. they may have to air on doing too much to stall that growth so we don't have an inflation problem down the road. here,cking with the right

coming up on the program, the auction block. the new government looks to form a budget. this is bloomberg real yields. ♪

♪ >> i'm jonathan ferro this is bloomberg real yield. on the auction block for the u.s. credit market continues to show strength. supply for this month has already topped $60 billion and has been absorbed well. bringing $6 billion around you. elsewhere in treasuries, the u.s. sold a combined $73 billion at 3, 10, and 30. the second largest since 2010.

in the 10-year sale, the primary dealer award with the lowest since january. in europe, amid italy budget the seven-year cell received bids worth 1.285 down from 1.64. italy very much a topic of discussion this week addressing concerns over the country's new government. words have created some damage. and interest rates have gone up and they have gone up for households. and they have gone up for firms. all of this has created much spillover to other countries. far,ll remain at least so pretty much an italian deficit. >> it looks like a bit of a

snooze fest right now. it was interesting for the better part of five minutes. how do you think the policy will adjust over the next 18 months? >> we have the meeting this weekend. we really did not get a hold out -- a whole lot of specifics on what they are going to do on the policy front that we did not already know. they are going to lower the pace of pushes in october and they are anticipated -- anticipating to end qe at the end of this they are basically telling you that yes, we are aware of what is happening in italy but it's not really a policy concern because the rest of europe seems to be doing quite well. >> obviously european quite it -- credit is something quite different. the u.s. high-yield has outperformed global high-yield for the most since 2002. is that really true? >> it's not that big a gap if

you are just talking about corporate debt. the u.s. high-yield market has done better than anyone would have expected. but the real argument former has been emerging markets. we know that's a story. , that'swe agree upon probably where the real value is. you have to have a summit for it because there's going to be some volatility but that is where underperformance comes and that is where the value seems to be in the marketplace. >> is that right? >> yeah. i think it might not be right in the next month or two but if you look at where valuations are, where we are in the cycle, it makes sense. i don't know if it's convergence or divergence. essentially, more than likely you will see stuff outside the u.s. for the next 12-18 months outperforming. >> i guess that is convergence. >> indeed it is. i'm glad to see talking about getting away from high-yield. that's a nice change of pace. we continue to believe the best value in credit is really an

emerging markets week as they have corrected in a meaningful, meaningful way. the spread between the 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 be a lot of volatility and it will depend on the convergence working out the right way. >> can we get a bit more polarization within the complex? >> absolutely. that is really important. you can't just say it is to completely different markets. for 75% of the country, you haven't seen that. it hasn't really underperformed much. you are talking about argentina and turkey and to a lesser extent, brazil and russia. things that have to happen, there are all policies that have to be put in place and the dollar is going to be a big story. >> give us a flavor of what you have been up to. >> not a whole lot. year positionhis

with quite a bit outside of the u.s.. we have probably added a little bit. we do think argentina is a particularly interesting opportunity and their support for the imf. you have to your local bonds -- you have two year local bonds and the odds of that outperforming is very high. >> again, emerging markets are the best value if you buy anything at the margin. that is where you will be looking for value. let's just be clear about one thing. that is emerging markets, local currency as well. local currency has underperformed the u.s. assets in a meaningful, meaningful way across the board. substantially weaker and therefore a tremendous amount of value there. >> stay with me. in the market, a check on the

week. 2% on a one-month bill in the treasury market. up for basis points -- of four basis points. still ahead, a decision from the bank of japan and the 10th anniversary through the weekend of the collapse of lehman brothers. this is bloomberg real yield.

♪ i'm jonathan ferro, this is bloomberg real yield. time for the final spread over the next week. we will have the official 10 year anniversary of the collapse of lehman brothers plus a summit of career, a decision from the bank of career -- bank of japan and across europe as well. 10 years looking back, i want to look forward and think about post crisis, how this market has changed.

a lot of people point to illiquidity and what should be a very liquid market treasury. has that changed in the treasury market? >> you don't really see any change in illiquidity. it looks like a very liquid market. what i think would fundamentally changes on the regulatory side. dealers like ourselves are subject to requirements and leverage issue requirements that constrain our boundaries. we are less willing to warehouse treasuries like we used to in the past. and that is leading to illiquidity in the market. >> a lot of people point to that sleepy day in october of 2014 when treasuries had this huge ofe out of nowhere and a lot people think about that moment and think about what could happen on a really, really bad day when money floods into treasuries. what does october 2014 mean to you and can you really tie it back to the regulatory regime

that came post crisis? >> obviously there are a lot of factors but that is an important factor. it has manifested itself much more in a corporate market because the problem in the corporate market is that you might have an equal amount of buyers and sellers of the buyer mark b of walmart bond and the seller is verizon wireless. there's a buyer and a seller. there's definitely much more matching involved. but that does expose the market -- you get one side of trade one way or the other, you could see very sharp movement. >> i think the picture for liquidity comes through in treasuries than it does in on the run treasuries. and there the picture has certainly deteriorated. whether that is a bad thing for the market, i'm not so sure. why should we be making a really liquid market, i don't know how does that help us?

having said that, i think the point about the corporate market is a good one. innovation in the corporate market from a liquidity standpoint isn't the dealers or anything of that sort. it usually the eps. providing countercyclical liquidity that you would not normally gets. because of the aggregation of the risk, you can get second leaders to take the other side of all corporate investors looking to dump corporate bonds. corporate investors go one way. they are buying all of them were selling all of them. normally because of the allegations, people have a challenge. but availability has simply help. >> a final word on that, the shift to passive? >> first of all, and a lot of credit etfs are really passive. they can't buy every single bond on the market. the second thing is he is absolutely right. from a liquidity perspective, it's a disaster for investors. particularly in high yields,

they have willfully underperformed -- woefully underperformed. there is a perception that going passive of the that may be true in segments but it's the exact opposite. 85% of managed funds have been these things. >> and it's a really good final point. i am going to take the opportunity to ask you some quick final questions on this program. get ready. do treasuries keep the risk beginning characteristics in the next downturn? yes or no? >> yes. >> yes. >> absolutely. >> have we seen the cycle rise on treasuries versus bonds on a 10 year maturity? >> not even close. >> no. >> not close but we are getting there. >> i think this is just for you,

this on a question is for you. you don't have to play if you don't want to. u.s. high-yield on leverage loans? >> high. u.s. high-yield by a wide margin. >> i'm going to pass. >> leverage loans. from new york, that doesn't for us. we will see you next friday at 1 p.m. new york time, 6 p.m. in london, for our audience worldwide, this was bloomberg real yield, this is bloomberg tv. ♪

alix: opec's warning versus iea supply fears. opec highlights the global economy while the iea warns of oil prices over $80 a barrel. florence is a deadly game of chess. hurricane florence barrels toward the east coast, disrupting commodities from hogs to sweet potatoes. and brown into trump, you are the saboteur in charge. governor jerry brown goes all in on climate change and is signing a bill to move the state to 100% clean energy by 2045. -- 2025. i am alix steel. welcome bl