jonathan: from the city of london, 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ italian populist of proposing a bigger budget. the treasury delivering a weeks of gains. heading into q4. we are set for the biggest annual loss since 2008. we began with a big issue. populist bettering the italian bond market. >> we had these rolling

existential crisis if the euro survives for years, and this is just one more stress point. >> 30%, which is a burden. they cannot be going even further. >> italy is a big economy in the european union. that should be a focus of concern. >> italy is still on a knife edge situation for me. >> this has been pressuring the markets for months it seems now. even if you get the budget problem out of the way now, it has been resolved. they come back to this question in the next few months. >> there is something of a showdown that have to be followed through vis-a-vis the italian government and the european union. >> this is happening right is the ecb is dialing down qe. from $30 million to $15 billion and like the zero in january. we are wondering who is going to

be supporting italian deck going forward. jonathan: joining me is diana , plusand scott thiel coming to us from chicago is colin robertson. diana, talk about what is happening in italy. how big a risk is a budget deficit of 2.4% of gdp? diana: markets have been expecting something below 2%. we had numbers closer to 1.6%. 2% was really the top side the markets had been expecting. 2.4% is not a great number, particularly in the context were in the past they have been able to meet their one-your projections. this time they don't necessarily have the tail went that they have historically had, and you have higher rates coming through as well. scott: it's important to take the number and context of the market.

italy had been meeting with investors to talk about this denver in particular, but more generally the italian situation overall. they guided us to a number that was closer to below 2%. surpriset's about the that it now is for two-years. it is 2.4%. if you look at the most pragmatic was 1.6% and the widest was 3%, it's important but i think it's more about the expectations going into the announcement. jonathan: another set of expectations with the finance minister would be a moderating force. and quite rightly in many people's minds he would be that moderating force if you look at the other side of the budget discussions. is there a moderating force in the italian government? colin: i don't think there is one left. this did surprise me, the 2.4%

they came out. what we need to expect is more volatility with respect to italy. what i find somewhat encouraging today is the fact given this news, which was only a handful of basis points, 25 or so, that the 10-year moved up. washe context of what this of 2.4% versus 1.9%, i found it a little bit encouraging and actually the spread versus bunds did not widen out as dramatically as i thought. i have been presently surprised. points is25 basis always a welcome move. scott: the intraday volatility is gigantic. in the last day in a half a one of 1.5 points with no volume. there was no real contagion effect throughout the capital markets today. looking at italian senior spreads, something spreads were

40 wider. south african cdf's were unchanged on the day. this is not been one of these events. it was kind of limited to italy. i think it is relatively a big move. if the italian bond market had taken up a high yields at the end of august, another 25 basis point from here, we might start to see that contagion. jonathan: it is isolated to italy which makes you wonder how mispriced bunds might be. ecb seems optimistic about the situation, the fundamentals of europe. you have got to believe the ecb's monetary policy stance will move from where it is currently. diana: it is interesting to me. we talk about the contagion being limited. you have to look at correlations. the euro-dollar still reacted.

it does not mean we have not seen a slight repricing. it is something the ecb will be watching very closely. they have to deal with the italian headache. for them the outlook is actually much more -- by this outcome than if he had the 1.9% budget number we would have. jonathan: the market is drawing a distinction. do you think the risk is there? we can be on the path for exploring redenomination risk in a eurozone country? scott: i don't really think we are at that point yet. colin: i think we need to take it a couple more steps further to be a stress for the market. that type of redenomination risk, i don't think we are there. jonathan: if you look back at the financial crisis, one hangover that is still here is investors are treating peripheral debt as if it is credit and not sovereign debt.

how much of a problem is that? colin: he went up having investors chasing the market both ways. if we look at a chart of non-european investors holding bonds, they went way down as the market sold off suggesting people were stopping themselves out of positions in august so in the market starts rallying no external investors can chase it down. that is very much a credit. if you think about the way people trade credit and get stuck, investors think about it. is wider than south africa. it is definitely treated as a credit. the volatility is a function of the liquidity which is terrible in the futures. you have his credit-like environment for sure. jonathan: do you see this environment changing anytime soon? the ecb has pretty much done all it can to stop the redenomination risk. diana: i don't think that is

going to change. i think if the ecb steps back e, it will become worse going forward. we no longer have that backstop. investors are left to support this market and need a factor in the fact that 2.4% might not be a disaster, but which point are you willing to take the risk when there is no sign of fiscal consolidation on the horizon? the other function is the bund market. liquidity has gone way down. the spread between the treasury market and the bund market has widened out dramatically. if you look at the liquidity in trading volumes, they have gone way down as a qe program has been winding down. i think there is a strange liquidity premium keeping the

bund market in this lockdown that you described earlier. sticking scott thiel with me, alongside diana amoa and colin robertson from northern trust asset management. on the auction block, of it all the concerns on italy the government is offering up some debt. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro and this is "bloomberg real yield." we saw another big loan sale this week. credit suisse received so much demand for a $5 billion loan that increased the final size by

$400 million and is closing down a week early. is financing kkr's leveraged buyout. italy auctioned the five internet in your debt. states, despite the treasury auctioning off two and five-your notes, buyers but the two-year note that's all the weakest level since 2008. all those auctions were held before the federal reserves decision to raise rates once again. >> the fed the note to shock the markets by making as much of a change at all. >> right now things are booming. the fed is reacting to that. >> assuming the fed itself -- >> there is no sign the fed plans to pause. >> it is a recipe didn't quietly and judiciously and don't do

anything radical in one way or the other. four expect we will see rate hikes next year after another one at the end of this year which is above what is being priced in. >> the committee will simply said policy and the best long-term interest of the country and of the economy. i think they will do their very best to ignore outside pressures. >> the economy has been doing quite well. i think that is because of the tax and regulatory reform. the fed's policy about normalizing is part of that in the markets will be working better as that continues and i hope it does. jonathan: still with me, diana amoa, scott thiel and colin robertson. colin, i want to begin with you. the reserve moving that word, "accommodative." is is still in accommodative federal reserve? colin: yes, it is still in

accommodative federal reserve. there are a number of important things going on here. removal of "accommodative" was them more of a position and that's what chairman powell wanted to send the message of, that the data is what is important. we know it is priced into the market and we know the expectations are for the fed numbers with respect to the dot plots. if you look at the dots, obviously there is a move priced in here in december and three more next year. that would put us at a position h, and end of 2019 at 3/8t that seems high to me for the 10-year treasuries. when you look further out where thedot plots are measured, expectation is we come to a terminal spot around 3%. varied. 2021 dots are

when we see inflation stuck at low levels and moderate paces of growth, the likelihood of one move this year and three next year is really overblown. i think each move they make, the next one will be that much tougher. jonathan: diana, what are your thoughts on that? you can tell a story that would you put the dots on the screen and see the spread, they are all over the place. diana: i think that is right. the fed has been hiking rates and's 2015 -- since 2015. we have the fiscal stimulus which my potentially be moving next year. there is a lot of uncertainty in the outlook beyond the next 12 months. that will introduce uncertainty in the dots. jonathan: they are not in the business of forecasting recessions or economic downturns. that would mean policy is of the wrong place. do you see them needing to respond to a downturn in economic growth anytime soon? scott: no, i don't think so.

pragmatic is the way i would describe their overall position and chairman powell's presentation. as the long-term rate gets above a more neutral rate, they will be some reflection to how far they want to push rates. i think they are on a very preset course for the rest of this year and into next year. it is interesting to note basically all real rates have converged to 1%. there is this concept the market is reflecting economic growth and accommodation is being withdrawn. it is interesting that the market is getting to that place. jonathan: how do you position the long end of the treasury curve? they are huge appetites by the front and. -- front end. when would you put duration back on? scott: from a long-term for the middle perspective, it is very consistent with a flat in

flattening yield curve. that would suggest the yield curve should flatten on balance. in the near-term if we look at the amount -- the fully priced in front end of the market, the a lot of tightening priced in already, it is hard to price in more than three or four rate hikes in a 12-the month period. also from a capital appreciation perspective. to longer term trend for a flatter yield curve is entrained. the shorter maturities offer a better value. jonathan: walk me through the why. scott: the five-year almost week.d 3% this let's say you read 1.5% for very diversified corporate spreads are you add 3.5% from emerging markets. talking sudden you are a yield of 4% or 5%. if you carry that high and you have this idea that if the figure of -- that the fed

was to become more reflective, did have a situation where to get it 20 to 25 basis point rally. that would give you some capital appreciation. jonathan: what do you think of that trade quickly? colin: i would agree with that trade. further question, i would be willing to put money to work in the longer end of the curve. scott's point about the short and are spot on, but there is opportunity further out. it's a real possibility in my opinion there are two more hikes, not four expected to the end of next year. jonathan: you will stick with me. colin robertson, diana amoa and scott thiel. week, let'sts this get a market check for you. play shape up as follows. you see the bid coming in on the back end of the 10's.

we get a rally to the back into this week. spreadhead, the final and the week ahead featuring comments from the fed'd jay powell and the u.s. jobs report. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. china's financial markets closed all the due to holidays. jay powell and theresa may speak. on friday the jobs report just around the corner as we wrap up the end of september and the third quarter. still with me is diana amoa, scott thiel and colin robertson. london as we wrap up the quarter. this is a really interesting

quarter for credit and an interesting year for credit in the united states. high-yield really outperforming. scott: it is interesting to note if you look at the ratings structure and the high-yield market, the lower quality, the triple c's are now double b's. it has really widened relative to i.g. that is obviously consistent with economic -- positive economic activity, payable financing rates, stock by that's -- stock buybacks, etc. that's an interesting divergence between em market in the high-yield em market. jonathan: this is where you specialize in spend time looking at stuff. the third quarter has been brutal for emerging markets as people wake up to the idea it is not idiosyncratic and there is something broader happening here. mena: it's interesting to

and i think the point on what has been widening in em is key. brazil,a, turkey, indonesia. i think where he are at this point is we are at a point or argentina seems to be heading in the right direction with the imf coming on board and money coming through to the country sooner. turkey delivered despite a lot of criticism. a lot of high-yield names are looking better. we expect in this quarter to see some of that performance come through. jonathan: some of the local issues have been addressed but we have the macro problem for emerging markets. china has slowed high yields to the united states. can you be constructive on p.m. right now? -- em right now? scott: we have had some

high-yielders really implode. there has been a really big rally for the end of august in some markets. 11.5%h two-year bonds, yield to 5% yield. as investors are concerned about the backdrop and concerned about to someratic risks, degree there is uncertainty that has been addressed. look at the fed's statement. the chinese response to the terror of situation seems to have some sort of calling feelingg. calmin i think there are really some interesting opportunities in the higher yield. do mentionhen you the hedges, the yield pickup is not there for treasury, put in europe or japan. how important is that aspect for the treasury market at the market to attract foreign buyers? colin: i don't think it is overly critical. there has definitely been a

shift in the valuations that make it more expensive. evidence by the fed where long-term treasuries are at now, i think there are pivotal buyers that are happy buying treasuries and longer-term debt at these levels. it is important to have the buyers that could come in from overseas, but i don't think that is the driver and i think as the , it will down the qe most likely be domestic buyers that are more critical to the treasury market in the u.s. versus outside. jonathan: really thought. . we will in this -- really thoughtful stuff, guys. you have to answer as quickly as possible. when the federal reserve is on course to close of the year? diana: yes. scott: yes. colin: yes. jonathan: unanimous. hold give up i have through the end of the year.

bunds or ptp's? diana: btp's. scott: btp's. colin: i will take the bunds. jonathan: the job outperform investment great in the u.s.? b's.: yes but double scott: investing great live perform. colin: high-yield outperforms. jonathan: we make a market the end. that he very much to diana amoa, scott thiel and colin robertson. that does it for us from london. we will be here from new york . this is bloomberg. ♪ ♪

mark: this is first word news. senate republicans do not yet have enough votes to confirm brett kavanaugh to the supreme court. that is according to south thune.s johnson -- john

he says republican still have a little work to do to get enough support. the committee is set to vote at this hour to send kavanaugh's nomination to the full senate. deputy attorney general rod rosenstein has agreed to speak privately with house lawmakers. it is not clear when the meeting will take place. republican leaders said they asked him for a meeting and threatened to subpoena him if he refused to answer questions. rosenstein will meet next week with president trump following reports he discussed secretly recording the president. former british foreign secretary boris johnson says he thinks theresa may's movement for brexit will be to political and economic disaster and is not ruling out trying to replace her. johnson quit the government in july, citing his opposition to the prime minister's plan for close regulatory and economic ties with the european union after the u.k. leaves. he told the bbc may's