jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, a slow-mo selloff in the global bond market driving treasury yields towards 2018 highs. risk appetite returning, driving investors back towards emerging investors back towards emerging markets, fueling a big bid into corporate loans. we begin with the big issue, the quiet climb through 3%. >> our take is it's about time that the 10-year started pricing in what the strong u.s. economy is doing.

>> we've been expecting 10 year yields to remain around a range of 3%. they were a little lower another backup just above. backup just above. we think the levels will attract investors. >> look at the difference between the 10-year in the u.s. and in germany. it is 254 basis points today. there is a limit to how much you can stretch that without breaking something in the system. it can go wider, it's just that what happens when it does go wider? you will get dollar appreciation, more emerging-market pain. it absolutely can go wider. >> vol in the rate market is due to go up, as the fed policy is beginning to bite just a little, not badly, but just a little it is starting to leave a mark. >> value stocks, tech stocks, and now interest rates. i think there might be more room to run and this could get the fed some cover. they had been adamant they will slowly increase rates over time. jonathan: joining me in new york

is jeffrey rosenberg, krishna memani and portfolio manager noelle corum. let's begin with the quiet climb higher in treasury yields. do you expect it to continue? noelle: yes, you nailed it. it is a quiet climb higher. we think it is due to a couple of reasons. the drivers of course are exactly clear. part of it is that tariffs not being as bad as people expected, maybe marginally. the trade war is not over by any means, but part of it is we have seen the e.m. idiosyncratic risk come off the table. turkey and russia are both hiking to alleviate concerns. argentina, the deal with the imf looks like it will be better than expected. it is not any one driver. it is multiple.

krishna: i think at the end of the day it's about the u.s. economy doing much better than what everyone was expecting. that is the primary driver. noelle's point about other issues are important, but the primary driver is the u.s. economy. so the question is, can this be sustained for a long period of time? i think the near-term climate is because the fed consensus is building up quite nicely. our position is they still have room to tighten. i think they tightened a couple of times this year. if they keep on this path in 2019, the environment becomes far more challenging for them, and i don't think it is truly sustainable in the long run. jeffrey: let's break down the movement in interest rates between real and inflation. most of the movement up through this 3% move has been a move from real interest rate.

that's about fed speak, and debate over the neutral rate. so that leaves you some room on the inflationary side. if there was any uptick in inflation that you could still press to higher rates, you have the neutral rate debate. it is about the economy. as the strength of the economy persists, and if it persists, so will expectation about where the equilibrium rates can go. you can get higher rates on both the real and inflation rate. jonathan: the rate will move along with it in the future as the economy improves. the big question is risk appetite returning to the market , whether you can get a simultaneous lift in treasury yields and risk appetite abroad. can you? krishna: if you look at history, it is far from being incongruent. i think if the economy is doing reasonably well, inflationary pressures, contrary to what jeff was talking about, inflation is really not picking up. it has picked up some but it is not picking up north of 2%. if that is the case and the

profitability growth is relatively good, that's a good environment for risk assets. jonathan: interesting dynamics this week. we saw yields pushing higher, but the dollar driving lower. i wonder what you think that dynamic at the moment. is that a tension, or does it make sense to you? noelle: i would agree with krishna. we see inflation going into year-end softening around 1.9%. these drivers, the risk stories are coming off slightly. again, the trade war is not over. this is just the beginning. but we are seeing that come off slightly. that is allowing fundamentals to take over and people remember the u.s. economy is actually growing fairly well. that is not going anywhere because fiscal policy is supportive and that consumer is confident. krishna: i think the driver of the dollar, the rate

differential is clearly a big driver, but equally important is the u.s. fiscal deficit, and the ensuing u.s. trade deficit, which are very related. effectively, the u.s. fiscal deficit gets financed by the trade deficit. if you think of it that way, the strength of the dollar story because of rate differential starts to fade. this was our expectation and how things were playing out until april, then rate issues took over. now i think we are in the second leg of that trade. that is dollar face. from a long-term perspective, dollar strength when u.s. fiscal deficit is $1 trillion is difficult to put together. jonathan: this was the 2017 narrative. i heard a whole lot about it, that to fund the deficit you either needed substantially higher treasury yields or a

weaker dollar to attract the capital. are we back to that again? jeffrey: i don't think so. in 2017, it was lagging. this year it is about the reversal of that. growth solves a lot of problems. it is not just about the fiscal deficit, and i have to finance that with portfolio flows into treasuries, there is lot of means for the mantra holding the dollar. u.s. growth is another factor weighing on the positive side towards the dollar, not just the interest rate. jonathan: it has fueled that divergence narrative through the first half of this year. a conversation is if we get convergence. something important has taken place, and it is the bund versus treasury maturity. getting wider and wider. even though people are looking for convergence, those people just keep getting burned. we broke at a new multi-decade wide. where are you right now? noelle: we think it could continue to be rather steady --

at least in the near term, that going into year-end, european growth is looking relatively strong. the negative contributor we saw earlier this year after a very robust 2017 into european growth are no longer. we are talking the french strikes and harsh weather conditions. now we are in a sweet spot where we have an economy in the beginning stages of the recovery cycle and an ecb that is still accommodative, and a consumer that is still spending. jeffrey: one of the interesting things about the bund-treasury spread, it may not have anything to do with the buns and treasuries, and everything to do with the boj. as you see the boj today, a little bit of movement on the steepening of the curve. it is still relatively happy days, but the amounts coming out of japan going into europe because of the steepness of the curve is a big factor in that

treasury-bund spread. as the boj policy evolves, as the economic fundamentals warrant, you may see some pressure on that spread come off. krishna: i think european rates are a product of a bunch of things. part of it is european growth outlook. we have a slightly different take then noelle. we think european growth probably does not re-accelerate. if anything, it's sort of tapers off. i think the driver of that is the slowdown in emerging market growth. emerging market growth has been one of the biggest drivers of the revival of european growth. that story stabilizes our faith and i think you have an impact on european growth. i think the european fundamentals, far more than flows out of japan that drive it. let me make another point -- jeffrey: i agree with that completely. i was just making the point that it was a factor in the european fundamentals being the biggest driver.

krishna: one point about 2017 and 2018 we talked about, the fiscal deficit in 2018 is getting far worse because of the tax. all the things we talked about in 2017 applied to 2018 in spades. we have to be cognizant of that in formulating our long-term view of the dollar. jonathan: krishna memani from oppenheimer funds sticking with me alongside jeffrey rosenberg, and noelle corum will be sticking with us as well. coming up, the auction block. nestle, a strong investor appetite for their offerings. this is "bloomberg real yield." ♪ ♪

jonathan: this is "bloomberg real yield." i am jonathan ferro. i want to head to the auction block. we start with treasuries. $40 billion sold this week at 2.02%. the highest rate for an auction of one month securities since february 2018. all of the u.s. bills have been auctioned this year at rates about 2%. nestle sold $8 billion worth of funds for a partnership with starbucks. the biggest headliner of the week was rifinitive. investors devouring debt sold for blackstone's buyout, completing the largest leveraged buyout of 2018, $18.8 billion portion of the offering exceeding $10 billion. still with me, jeffrey

rosenberg, krishna memani and noelle corum. noelle, leverage loans have exploded this year. the demand is absolutely massive. where do you stand on the big debate in fixed income right now? noelle: we continue to like leveraged loans. we don't think demand is going anywhere. a lot of those flows are coming from the institutional side. rosenberg, krishna memani and noelle corum. noelle, leverage loans have exploded this year. the demand is absolutely those flows tend to be rather sticky. as long as u.s. growth is healthy and we expect it to be for several quarters, that will continue to support leverage loans. krishna: we agree. leverage loan market is being driven by a need for income in an environment where rates are rising. i think that gets you to the i think that gets you to the right point in terms of demand and supply. the overall -- the cred quality of the corporate sector is stable. it's not superlative, but it is stable, in our view. and the fact that loans are senior at this point in the cycle where credit spreads are relatively tight. i think that makes them more attractive as well.

jeffrey: we all agree from a short-term perspective rising rate environment, good economy, good economic outlook, great liquidity environment is a great environment for low default rates. they do better in that kind of environment. the one piece everyone knows about, and investors going into these know about it as well, but it is setting the asset class up for a very different experience when the next cycle happens. where are you in the capital structure? what does seniority mean? the leverage market is going through structural change. it's not your father's or great-grandfather's leverage loan market. subordination levels are nowhere near where they were a generation ago. you just have a very different product. it looks a lot more like bonds. that's ok. everybody understands what they are getting, but it means higher losses when you go through the

next default cycle. jonathan: you make three points here. one point is on quality. the second point is where you sit on the capital structure. can i just pick up on the point where you sit on the capital structure? the pushback against the huge demand right now is there are a lot of companies that are loan only. if you think you going to up the capital structure, you are not because there is nothing beneath you. how often do you think about those things when you look at leverage loans? krishna: the leverage level overall is lower than what it would be fully levered up in a regular company. you may not have anything subordinate to you in terms of other debt instruments, you have equity that is subordinate to you. it is a subtle point. the point that jeff is making is a good one. let me respond to that. if you look at the historical data, there is absolutely no proof whatsoever that -- leads to bad outcomes. let me be clear about that. the reason is it gives you the

flexibility to restructure a company out of bankruptcy you would not have otherwise. that's point one. second, it is not about levered loans all over. it is about levered loans from specific companies. it is a bottom-up exercise. if you are buying a levered loan for a lower default, make sure they are going to have a lower default. picking up companies bottom-up i think is very important. jonathan: i want you to weigh in on the discussion on quality. are they buying quality? noelle: real quick, the thing

noelle: real quick, the thing that really changes this is growth. as long as growth is where it is, and we don't think 4% number that we saw in q2 is sustainable, we think we will print high 2's this year and next year it will be solid and that will support fundamentals. quality obviously is important and that is definitely something you have to think about. we are not quite there yet. we don't think it will be a 2018 story. jonathan: is it a choice between junk, u.s. high-yield, levered loans? is that what it comes down to? noelle: if you think about high-yield, it is stuck between these two driving forces. one is outflows and the other is supply has not been there in the way that it thought it had. high-yields performed rather well. high quality is yielding around 5.5%. that is attractive. leverage loans is around a similar 5%. we like opportunities in both, especially while growth is doing what it's doing.

just if i had to pick up would probably go with levered loans. krishna: i think investing -- people's need for income is perennial. perennial. in that context is a question of how are you going to generate that income? that's how we have to think about it. and therefore whether it is investment greater high-yield or loans is a choice you have to make. if high spreads were materially higher, i think going on high-yield and make perfect sense. the upside is constrained. downside is significantly more than loans in our judgment and we get to leverage loans. jonathan: krishna memani sticking the with me along with noelle corum and jeffrey rosenberg. i want to get a market check for you on where treasuries have been through the week. yields up three basis points. i want to get a market check for the run-up in yields continues on 10's and 30's. 3.2% on the 30 year, 3.07% on the 10 year.

still ahead on this program the final spread. a decision from jay powell and the federal reserve. a preview is next. this is "bloomberg real yield." ♪ ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." it's time for the final spread. coming up over the next week, a busy week in new york city. united nations general assembly. plus, the fed decision. speeches from both mario draghi and koruda. another round of tariffs set to take affect between the u.s. and china. still with me for some final thoughts is jeffrey rosenberg, krishna memani and noelle corum. for the federal reserve, key things to look ahead to next week? noelle: we all know they are going to hike most likely. we're kind of just watching. basically we think that the

surprise is going to be to the dovish side. december is already priced in at 70%. we don't think they will come out overly hawkish at this point. we are watching the trade monitoring. monitoring its impact on growth. we think they want to see it feed through to harder data and it could be as early as q4. also, any talk around full employment. i think they are going to keep that subtle, but it is something they are discussing. we think they may address it next week. jeffrey: there are four key points. the most important part is, do they change the language describing the stance of monetary policy? don't expect it, but if they were to that would be a big point. second is economic forecast. the longer run forecast for the employment rate. the third point will be how does

jerome powell characterize growth? i think we will get much of what we saw in is jackson hole speech. the fourth, and probably will moves the markets the most, is the dots plot. we have another year. i think we look at consolidation around 2018 and 2019. the longer run dot, the addition of the new members potentially brings down some of those figures. that could be a dovish outcome for the market. krishna: i think jeff is right. there is potential to look at the long-term dots and come to a dovish conclusion if you're that way inclined to begin with. having said that, i think if you kind of think the fed is data dependent, there really has not been any softness for them to give us any concert on the dovish front. we think they will eventually do that and turnaround the first half of 2019. for that we need to see a little bit of data for it to come through.

jonathan: what do you make of the 2020 obsession that is emerging between economists? jeffrey: part of it is the fiscal math. they could see into 2020 that you are mathematically engineering the recession. someone say there is productivity in the pipeline. there is animal spirits. there's 3% and it is sustainable. that is where you are getting the 2020 thing. jonathan: that's what i want to pick up with right now in the rapidfire around. beginning with the first question, do we get a recession in 2020? jeffrey: no. krishna: no. as we talked about last time, five more years. noelle: no. jonathan: is it too early to go long em risk? jeff? jeffrey: no. there are some pockets and opportunities, you have to be

selective. krishna: you should be long em risk today. noelle: too early but we do like countries that are exposed to u.s. growth. jonathan: so many people come on this program and say the path of least resistance, the treasury yield is lower, and yields have gone higher. lower or higher? jeffrey: higher. krishna: short-term higher. long-term lower. noelle: i'm with krishna. short-term, a little bit higher, and the long-term lower. jonathan: fantastic stuff. thank you so much to jeffrey rosenberg, krishna memani and noelle corum, thank you for joining us. see you next friday at 1:00 p.m. new york time. this is bloomberg. ♪ ♪

alix: from trump to opec, we will remember. president trump goes after opec for higher oil prices. can saudi arabia and russia do anything about it? flying high on alpine high. the apache ceo digs deep into the plans for alpine high. he talks about oil and gas exposure. here comes the sun. sun power breathes a sigh of relief after getting exclusion from u.s. tariffs for imported solar panels. how competitive they are over their chinese rival. i'm alix steel. welcome to "bloomberg commodities edge," 30 minutes focused on the companies, physical assets, and trading behind the hottest commodities with the s