"all sites are green." all of which helps you do more than your customers thought possible. comcast business. beyond fast. >> from the study of london, on jonathan ferro. this is bloomberg real yield. ♪ coming up, italian proposing the italian bond market. treasuries delivering a week of gains leaving yields negative. investment into q4, set for the biggest annual loss since 2000 and. we begin -- since 2008. we begin with the italian bond market. >> rolling existential crisis

about whether the euro survives. this is just one more stress point. a burden that can be going even further. >> of course, italy is a big economy in europe that should be cause of concern. >> this has clearly been something which has been pressuring the markets for months, it seems. even if you get the budget problem out of the way now, we come back to this question in the next few months. there is something of a showdown that's still got to be followed through. government italian and the european union. happening, and then likely zero in january. we are all wondering who is going to be supporting italian

debt going forward. jonathan: joining me around the table is a fixed income portfolio manager. plus coming to us from chicago is the head of fixed income at northern trust asset management. how big a risk is the budget deficit --? >> markets have been expecting something below 2%. the last few weeks we had numbers set to 1.6. 2% was the top of that the markets had been expecting. 2.4% is actually not a great number, particularly in the context where, in the past, they have been able to meet the one-year forward projection. this time around, they don't necessarily have the growth of a historically had and you do have higher rates coming through. >> i think it's important to take the number in the context of the market. been meeting with

investors to talk about the italian situation overall and they had guided us to a number closer below 2%. i think it's about the surprise that it now is, not only for one year but also two years. two and a half, 2.4%. keep in mind that if -- the most pragmatic was 1.6. somewhere in the middle, at the end of the day it's more about the expectations going in. jonathan: another set of expectations was at the finance minister would be a moderating thought heeople failed to be that moderating force. what are your thoughts on that? is there a moderating force within the italian government? isi don't really think there one left. this did surprise me, the 2.4%

that came out. i think what we need to expect is more volatility with respect to italy. what i find someone encouraging today is the fact that, given this news, only a handful of --only a handful of basis points. i actually found that a little bit encouraging and actually the spread versus boones didn't widen as for medically is a thought. i have been pleasantly surprised. basisan: the 25 point move -- >> the reality is that volatility is gigantic. it is important to that one, there was no real contagion effect.

some bank spreads were 40 wider, italy was 40 water. south african was unchanged. this has not been one of those events that was limited to italy. again, i think it is a relatively big move. if the italian bond market had taken out high-yield another 25 basis points of your, you might start to see contagion. italyan: it's isolated to which makes you wonder how mispriced bonds might be. just listen to commentary at the moment. they seem pretty optimistic about the situation in europe. to put it into boones, you have to believe the stance is going to move in the other direction from which it is moving currently. do you see that happening? >> it's interesting that we talk about the contagion being limited but you have to make a correlation.

haven't seenan we a slight repricing and it's something that the ecb will be watching very closely. they also have brexit around the corner. for them, the policy outlook is actually much more muddled by this outcome than if we had gotten the 1.6-1 .9% that we would have. jonathan: at the moment, the market is between a risk and re-domination risk. do you think we could be on the path toward exploring redenomination risk in a eurozone country? we are't really think at that point yet. risktype of redenomination , i don't think we are there. jonathan: if you look back at crisis -- one hangover that's still here, investors are still treating peripheral debt as if it is credit and not debt.

how much of a problem is that? >> you end up having investors chasing the market both ways. if you look at a chart of non-european investors, they actually went way down of the market sold off, suggesting people were stopping themselves out of positions since august. when the market starts rallying, no external investors chase it d own. if you think about the way people trade credit, they get stuck in that pattern. investors think about it. so, it definitely traded as a credit and the volatility is a function of liquidity which is terrible. you have this credit like environment for sure. jonathan: do you see that environment changing in italy anytime soon? can, yetone all it still the periphery trades like credit. >> i don't think that's going

to change. it's likely to become worse going forward. before you had the ecb as a pretty price in different buyer of debt. we no longer have that. investors left to support this market need to factor in the fact that the 2.4 might not be a disaster but it's still a deterioration in credit. at which point are you willing to take that risk when there's no sign of consolidation on the horizon>? jonathan: i'm guessing you don't have a price right now? >> no. >> the liquidity has gone way down. one of the interesting things is the spread between the treasury market and the bond market. if you look at the liquidity and trading volumes, they have gone way down as a program has been winding down. i also think that there is a strange liquidity premium isping the bull market

lockout what you described earlier. jonathan: black rock me, as well as jpmorgan. coming up on the program, the auction block. amid all the concern on italy, the government offering up some yes. this is bloomberg real yield. ♪

♪ jonathan: this is bloomberg real yield. i'm going to head to the auction block now where we saw another big loan sale through this week. we've seen so much demand for a

$5 billion loan to increase the file size by $400 million and in closing down the sales process a week early. over in sovereigns amid this , mixedbudget talks results with the demand for 10 year rising to the highest level since may. in the united states, despite the treasury auctioning off two and five year notes, buyers bought the 2-year note offering a ratio that matched the weakest level since 2008. all of those auctions were held before this federal reserve decision or the central bank, of course, raised rates once again. >> the fed didn't want to shock the markets by making much of a change at all. >> things are great right now, they are booming. the fed is reacting to that. >> assuming that the fed itself moves very gradually. >> there's no sign that the fed plans to pause. move's really a recipe to

quietly and judiciously and don't do anything radical in one way or the other. we actually expect we are going to see full rate hikes next year after another one at the end of this year, which is the problem with being priced in. >> the federal open market committee will simply set policy and the best long-term interest of the country and of the economy. and i think they will do their very best to ignore outside pressures. >> the economy have been doing quite well. i think that because of the tax reform. i think the fed policy is about normalizing, to get back to normal. i think the markets will be working better is that continues. i hope it does. jonathan: still with me, jpmorgan management and blackrock and northern trust accept management. the federal reserve removing that word, accommodative. is the federal reserve still in accommodative federal reserve? >> yes, it's still an

accommodative federal reserve. but i do think there's a number of important things going on. the removal of accommodated puts investors in a position and i think this is what they wanted to send the message of -- the data is what is important. we know what is priced into the market and we know what the expectations are for the fed members with respect to the dot plots. and i find that very intriguing because if you look at the dots, obviously there's a move priced in december. and there's three more next year. that would put us at a position at the end of 2019 at three and 1/8. that seems pretty high to me with respect to 10 year treasuries still trading at 3%. one other point i would make quickly is that when you look further out where the dot plots are measured, the expectation is that we've come to a terminal spot around 3%. buried --1 dots are

varied. when the data come through and we see inflation at low levels and moderate paces of growth, the likelihood of one move this year and three in a year is really overblown and i think that each move that they make, the next one is going to be that much tougher. jonathan: i what your thoughts on that. you can take the dots and tell a story but when you put the dots up on screen and see the spread between them, they are all over the place. can you read anything in 2019, 2020? >> the fed has been hiking rates since 2015. economic expansion is quite long in the truth. on top of that, we have the stimulus which my potentially be next year. there is a lot of uncertainty into the outlook beyond the next 12 months and that will introduce uncertainty in the dots. jonathan: you are not in the business of forecasting recessions or economic downturns. but if they were, it would mean the policy is in the wrong place. you see them

needing to respond to economic growth anytime soon? you see that situation materializing? >> i don't. they are in a pretty happy place. pragmatic is the way to describe their overall position in the presentation. i think as the longer-term rate gets above 3% or above a more neutral rate, there will be some reflection as to how far they want to push right. i think they are on a very preset course for the rest of this year for sure. and then into next year. it is interesting to note that basically all real rates have converged 1%. there is a concept that the market is reflecting economic growth and accommodation is being withdrawn. but it is interesting the market is getting to that place. jonathan: tell me about how you would position the long end of the treasury curve. a huge appetite by the front end. when would you consider putting duration back on and going further out on the treasury curve? >> you look at the closing of the u.s. applicant that is very

consistent with a flattening yield curve and that would suggest it should continue to flatten on balance. however, if we look at the amount of fully priced front end of the market, the amount of tightening that is priced in already, it's very hard with more than three or four rate hikes and we are right there. the front end actually looks attractive from a capital appreciation perspective. i think the longer term trend for a flatter yield curve is still in training, over the near-term the shorter maturities offer better value. jonathan: a shorter maturity from a capital return perspective. what me through why. >> -- walk me through why. 1% for very high quality, very diversified corporate spreads were you have 3.5% depending on your risk spectrum. all of the sudden you are talking 4%, 5% yields. youou carry that high and

have this idea that if the fed were to become a little bit more reflective about the pace of monetary policy tightening, you could potentially have a situation where you get a 20, 25 basis point rally as a result and that would give you some capital appreciation. jonathan: what do you think of that trade? >> i would agree with that trade. and for your question, jonathan, i also would be willing to put money to work in the longer end of the curve. points are spot on but i think there's opportunity further up the curve because of my view that it's a real possibility, in my opinion, that there's two more hikes, not four through the end of next year. jonathan: you are going to stick with me. in markets this week, let's get a market check for you from the treasury market. we shake up on a two-year, we ae the bid common on a 10 and

30, a marginal mild one as we get a rally through the back end of this week. still ahead on the program, the week ahead featuring comments from the fed jay powell. this is bloomberg real yield. ♪

♪ i'm jonathan ferro, this is bloomberg real yield. it's time for the final spread coming up over the next week, china's financial markets close all week due to the holiday. plus jay powell and theresa may speaking. the jobs report just around the corner as we wrap up the end of september and a third quarter. still with me from jpmorgan asset management, from blackrock and northern trust asset management joining us out of chicago. let's start in london first of all as we wrap up the quarter. it's really interesting.

interesting year so far for credit in the united states. high-yield outperforming. what you make of the dynamic right now? >> it's interesting to note if you look at the rating structure in the u.s., what has happened is that the lower quality have compressed dramatically into where the high-yield and southern investment grade has widened relative to. i think it's the outperformance of the high-yield market that's notable and that obviously is consistent with economic -- positive economic activity. stock buybacks, etc.. to me, that's the most surprising divergence between the high-yield. jonathan: let's talk about em. this is where is specialized. -- this is where you specialized. maybe there's something broader. what is your take on the third quarter as we approach the end

of the year and how you should be positioning? >> it's interesting. i think the point on what has been widening is quite key. most of the spreads widening we saw was in a few different countries. argentina, turkey, brazil, indonesia. i think where we are at this point is we are at the point where argentina seems to be heading in the right direction with imf coming on board. figure financing and money coming through to the country sooner. turkey delivered, despite a lot of skepticism that they would come through. a lot of those high-yield names that have been dragging em are looking at it better and we expect in this quarter to see some of that underperformance in high yields come through. jonathan: some of the local issues have been addressed but we still have the macro problems for emerging markets. china slowing down, high yields of the united states on treasury, rate hikes keep coming. can you be constructive on e.m. right now? >> i think they are spot on. the reality is we have had some high-yielders implode but with

some of the policy responses in these countries, there has been a really big rallies and the end of august and some of these markets. turkish two-year bonds in dollars. investors were concerned about the backdrop and about idiosyncratic risk. any is in credit risk to some degree, there's some uncertainty. risk to sometic degree, there's some uncertainty. the china situation seems to have a calming feeling. i do think it's an attractive market and there really are some interesting opportunities in the higher yielders. jonathan: i want to talk to you about whether the treasury market is attractive to the foreign buyer. the yield pickup just isn't there for treasuries whether you are in europe or japan. how critical do you think that aspect is to the market of the moment to attract foreign buyers? >> i don't think it's overly critical. i agree, i think there's

definitely been a shift in the valuations that make it more expensive. by the fact of where long-term treasuries are right now, i think there are incremented buyers that are happy buying treasuries and buying other longer-term debt at these levels. it's important to have the buyers that could come in from overseas, but i don't think that's the driver and i even think that as the ecb winds down and we had into next year, it will most likely be domestic buyers that are more critical to the treasury market in the u.s. of versus outside. jonathan: we are going to end of the show the way we always end the show. rapidfire around. three quick questions and you have to answer as quickly as possible. i'm going to start with an easy one, whether the federal reserve is on course for a fourth rate hike. yes or no? >> yes. >> yes. >> yes. jonathan: unanimous. there's one. 10 year burns or 10-year

btp? >> btp. >> btp. -- i willthe bones take the boones. jonathan: -- >> yes, but double b's. >> outperform. >> high-yield outperforms. jonathan: a bit of disagreement. thank you very much. that does it for us from london. we will be here from new york next time. this is bloomberg.

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