ields in years. chinese military unit made chips to embed in servers of 30 u.s. companies, creating a doorway into any network that uses these machines. malicious chips were never found, amazon and apple issued denials. david: welcome to "bloomberg daybreak." a lot of news today. alix: yesterday, bond yields, 3.2%. we should talk about this chip hack. it is day two of a global bonds selloff. s&p futures closed poorly yesterday. now down 10 points. euro dollar higher in part s,cause you're seeing gilt

, 3.22% 10 year yields. , what causedis why it, and will it continue? -- by .2% for crude. david: it is time for the morning brief. speaks to the economic club of washington. 8:30, last week's initial jobless claims. , the fed vice chair of addresses the st. louis fed on community banks. alix: it is the most significant supply chain attack against u.s. companies, chinese hackers planted microchips that infiltrated data centers of 30 u.s. companies, including amazon and apple. a bloomberg investigation

conducted interviews, and amazon and apple have disputed reporting. in the latest issue of businessweek hits the stands tomorrow. from washington is the author of this exclusive, breaking news story, jordan robertson. and howa hardware hack is it compared to the other hacks we have seen? >> this is a learning curve as we reported the story well over a year. a hardware hack is a piece of malware embedded on the chip that is fixed to a circuit board , effectively a permanent hack. the insidious part is if you can embed your malware on a chip, circuit board, that is a permanent infection that nothing can remove except throwing the machine away. if you have malware at that level, you cannot trust any

software that sits above it. in many ways it is the perfect attack. alix: why did china want to do this? >> one of the things we looked -- both administrations have 10 concerned about china's infiltration of the supply chain , but we thought this must be about consumer data, and we were quickly corrected by people familiar with the investigation. they said this is about long term access to sensitive networks and ip. it's not about stealing your data. it is about long-term access to sensitive networks. ofid: if you have a lot computers and software, how do you know that you are not possible as well. one of the questions we discovered his we assumed every company of any significant size

must be examining their hardware for these types of implants. what we found was most weren't. most companies have security technologies that look at software, network traffic. looking at hardware is very difficult. if you're waking up this morning and seeing this come the big oesson is not so much supermicr is complicit in this, but if you have hardware of any type in your organization, you have to have some process for looking at it and thinking about the idea that the hardware could potentially be compromised. telephone calls this morning between ceos and cto's. welcome now to the director of the national security law and policy program at george mason university. he comes today from washington.

thank you for joining us. are you familiar with this sort of phenomenon? a few seen these hardware hacks? >> this is a real problem. supply chain threats are real issue. hardware hacks are a real thing that does happen in the real world. these governments are looking to get any way into government and corporate systems, whatever methods they have available, and these are insidious problems that really do exist. david: if you are a company, how do you protect yourself? >> you have to be able to be looking at your hardware carefully, software and place looking for odd situations taking place, things happening that should not be happening. it is hard to find, but there are ways to look at that. david: if this is the game that

china will play, how can the u.s. play offense, not defense? >> we have to be deterring chinese activity. in the china is engaged largest intellectual property theft in history. we know they are aggressively targeting her companies. the russians, the iranians are out there, so we have to make sure we come together to stop these attacks. we are talking about some of the most security conscious companies in america, and they denied this thing completely. it will be interesting to see how this played out. david: from what your experience tells you, let's assume it is , are the chinese doing this to gain data that is itthem a back door, or a learned them to use these computers for malicious purposes beyond burning things? >> the answer is yes to both

those things. any exploit that collects information can be used as of cyber weapon to disrupt, destroy, or modify information. as we see actors getting more aggressive, particularly china, korea, wean, north have to look out and be careful. david: when you talk about cybersecurity come as ceo say we can't fight a war on all fronts. triage data breaches on a software and hardware level? >> part of the challenge is this is a scenario where government and industry have to work together. these are nations coming after our national interests economically, politically, and technology. we rely too much on private companies to do this themselves. the government has to build that relationship. we have to rebuild the trust of

they can work together to combat what is a national threat to the country. absolutelya saying not come it never happened. we are really concerned about cybersecurity. are we doing it to other countries the way they are doing it to us? >> the u.s. is one of the top nations when it comes to our offensive cybersecurity. a lot of times it is for the purpose of collecting intelligence. in otherls can be used ways. what we have seen is more aggressive action by countries like iran and north korea in destructive attacks. companies need to be realistic and realize they have to invest money and work with the government to get at this threat. alix: what would be of five will deterrent? m&a willutbound

happen less, but what is the deterrent? >> deterrents are limited. we prosecute, bring charges, you sanctions. those have proven to be ineffective tools in the space. we have to fight fire with fire. it mean cyber and all elements of american power. if you want to break things in the united states, we will break things there. the trump administration cyber strategy is more aggressive. we will see if they put that to work. that tilrayyou for insight. coming up, 10-year yields above 3.2% for the first time since 2011. more on this is next. this is bloomberg. ♪

david: time now for bloomberg first take. first, china's big hardware hack. amazon and apple say it is not true. finally, the big bond selloff. we are joined now by our guests. so, this big story about this hardware hack, this tiny chip so people can access u.s. computers, what does this do for u.s.-china relationship? this doesn't help. up theare bringing essential new cold war situation that will develop between the u.s. and china. china will deny. we will press forward. this will strain relations. i don't see how we come back

from this for quite some time. china denies it, it will be another smoking gun. >> from a security and military point of view, it sounds like that sources are telling us they've known about this for three years. part of aont, this is long-term process they have been going through. for trump, it bolsters his case on tariffs. from a political point of view going into the midterms, it makes his case even stronger that we have been in this war with china and we need to do something about it. david:from a if he knows this, e it is part of why he have the case? wrote theactically campaign strategy for the republicans going into the midterm. this is what i have been saying all along. the democrats have been pushing back. there is this wonderful independent newsagency verifying what i am saying.

up tos give him a leg what he has done with canada and mexico, and will now do with europe and tire trade relationships with the eu and say it is us against them. ,lix: the company's responses amazon saying it is untrue, apple saying they have never ornd a malicious chip vulnerabilities purposely planted in any server. saying they are not aware of any investigation. what honorable position does it put these companies in? either they knew it and are not saying it, or they didn't know, which is equally terrifying. important in the denials, that they don't know about this investigation. i think it also is true for , we protecties

data. we are looking into it. we want to ensure customers their data is safe. this is an ongoing issue for these companies, that they need to show customers their data is secure. david: they were so specific and saying this never happened. , they read the reporting had senior officials inside apple and senior government officials saying come a trust me, it happened. >> it is possible they have been told to deny it by the government and not to say anything because they are still in fault in the investigation and don't want china how far down the rabbit hole the u.s. government is in investigating it. look what happened of facebook when that became known. they need to protect their own , saying this is not true. you are fine. alix: they said they are not legally required to disclose

this kind of hack. is if youteresting look future wise, the dod has that contract with aws. they could push back on that. has relationships with the companies affected. >> and amazon's business with its cloud computing is giant for the company. some of the details in this story, in terms of the size of these chips, essentially like a grain of rice. maybe they have not found them yet. david: there is a bond market despite china and a remarkable run up in the yields, especially the 10-year yesterday. i also have something that illustrates may be why. we have taken a look at with the yield did yesterday. we have an orange vertical line that goes through when the isn numbers came out. numbers came out.

the blue is chairman powell saying we have a way to go before we get to neutral. the white line shows how much trading there was in futures. it was before powell talked. >> it was, but he stoked to the fire big time. when he said we will drive it passed neutral and we are nowhere near neutral yet, which implies 100 to 150 basis points. asset funds in the 3.5 percent range, you don't expect 10-year gilts to stay at 3.25% given the proximity to short-term yields. alix: where is my equity selloff, the complete panic. why aren't we seeing that? jerome powell has jerome powelo

bullish sign the economy is incredible and we are doing great. we have a jobs report on friday. we are seeing wage inflation for the first time. you are balancing those two things were people think we still have front of room in the fedomy, but also the raising rates and starting to see an inflection point in terms of the yields on the 10-year and 30 year. alix: this is why technical can be good. all right, thanks so much. you can find all the charts we used in more on gtv on your terminal and browse the recent features and save our charts. just go to gtv . coming up, more on the bonds selloff. why and what it means for the economy. this is bloomberg. ♪ this is bloomberg. ♪

alix: the bonds slump in the u.s. is going global. usin u.s.by a selloff in treasuries. this is the anatomy. the orange line is the ism

number, the blue line is when jerome powell spoke about hiking above neutral. joining us now is our chief u.s. interest-rate strategist. tooard technicals, expensive to hedge on an fx basis, what is the why? >> it is all of those things. it was like a perfect storm. you had fx hedging that was more difficult. you had a lack of buying from overseas. on top of that, you had good economic data, a good adp number ate ism unprecedented levels, particularly the component part of that. services represent the vast majority of jobs in this country. one level on ten-year

treasuries. if you break that, you don't have a lot of room above that. you had stops being hit and people unwinding positions because they get nervous. you are looking at more volatility until we find a new technical level for the market to stop it. david: what is the top? 3.25 percent on 10 year yields is an important level. we are not far from there now. one thing that often happens with the selloffs is you get selloffs in the u.s., then followed up in asia and again in europe, so the volatility from the european market is not helping u.s. treasuries find that base quite yet. if you break 3.25%, then we are off to the races again, more stops, more volatility. alix: 10 year jgb's russell must 15 basis points. talk about a selloff. that is outpacing the gilt market. past thee fed may go

neutral rate, according to jerome powell. let's talk to vince reinhart. he sees nowell said in the site for the growth of the economy. bad news is the chairman of the federal reserve is optimistic. it's true. they will be raising rates for the good reason that they are supporting ongoing economic expansion. ? if the goal is to firm up financial conditions, treasury yields have to go up. you have to take a little off the top of the equity market. david: how far up does it go? where is the top? >> the estimated term premium on ten-year treasuries are according to the federal is -50 basis points, so investors are paying the u.s. treasury to take duration risk. you seenot something

sustained on a historical basis. what is that neutral rate? premium?he term the term premium will go from negative certainly toward zero, and the neutral rate was probably in the neighborhood of 3.25%. alix: overseas, you will not argue strong economic circumstances are for germany. where is the biggest full mobility? turn theght want to question around. maybe the reason the ten-year treasury gilt was so both for so long is jgb's are so low and that bunds were so low. of the domestica, is letting a separate a little bit from them in terms of global economic performance. investors look at all the places it can put money in. the u.s. looks more attractive. david: why isn't the equity

market selling off more? >> good question. part of it is earnings continue to be strong, and chairman powell believes he will be tightening on the back of economic momentum. you look at the market reaction time equity market reaction to federal reserve changes, it could be anything. sometimes the news the fed chairman's raising rates is good news about the macro economy. sometimes it is making future earnings less attractive. alix: can we handle real yields at 1%? right now i'm aware we are in our cycle? we can take it? 3.9%,have unemployment at physical condition still remain accommodative. if we can't sustain it now, the market economy has some problems. david: it raises the question of

how much of the valuation is because of liquidity from the central bank. what is the real value? >> they will only be taking it out gradually. shrinkagen a path for very gradually. in the will be accommodation game for as far as the eye can see. are only talking about the ecb potentially raising its policy rates a year from now. vincent reinhart will be staying with us. coming up, more on china's chip pack with a u.s. senator. that is next. this is bloomberg. ♪

alix: this is bloomberg daybreak. i'm alix steel. welcome to date two of the bondll -- day two of the selloff.

we did see a messy the s&p yesterday. nothing like you would have expected after reaching that 3.2% level on the tenure. italian equities off by .1% despite the fact that the budget deficit draft assumes 1.6% growth over the next three years, which is high. in other asset classes, let us look at the aftermath of these higher bond yields. bund yields are up by about six basis points. 3.22enure in the u.s. is and the spread continues to andten, 33 basis points brent crude off by .2%. the question is, how did that contribute to the selloff? onid: let us get an update what is making headlines outside the business world. the most significant

known supply chain attack ever against u.s. companies. ,ccording to an investigation operatives from the chinese army implanted tiny microchips that made their way into data centers at some of the biggest companies including amazon and apple. the chips allowed attackers to create a story. they have disk beauty it summaries of the reporting. summariesve disputed of the reporting. the vice president will accused china of meddling in the upcoming congressional elections. he says china has launched a campaign of propaganda and coercive measures. it is part of the administration to increase pressure on beijing. morning, senators will get a chance to look at that report into sexual assault allegations against brett kavanaugh. the white house received the report overnight and sent it to

capitol hill, calling it the last addition to the most comprehensive review in history. for tomorrow. set a final confirmation vote could take place over the weekend. theresa may wants to rush her brexit deal through parliament. government officials hope that will head off the rebellion. they want the final agreement ratified within two weeks of signing the terms of the divorce. global news 24 hours a day and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. chandra. this is "bloomberg." thanks. for more on the report on chinese hardware infiltration of u.s. companies, welcome max baucus, former ambassador to china. thank you for joining us. you have had a chance to look at this. have we seen similar instances

of hardware hacks, implanting chips from other countries? max: this is the first hardware i am aware of. it is not the first time china has tried to infiltrate the states,ates -- united not only the government, but companies. it is a trend and it has got to be addressed. andid addressing years ago we got the chinese attention. they send people back to put together a cybersecurity agreement. it was a good start. we have to keep putting pressure on china to get more agreements like that. section three or one preceding going on right now, it deals with cybersecurity. it is largely a data issue rather than hardware. is that one of the ways to deal with this problem, through sanctions available? help butsanctions will

that is not a trade issue. it is more of a security issue which means we have to sanction statutes,r different as we did with the breach not too many years ago by the other government office. david: you spend 36 years in the senate. do we need new legislation or is there legislation that is sufficient to act? max: there is sufficient power. the question is finding the insuring -- letting them know they violated the law. i have read a transcript that it is clear they are violating the law and trying to hide it. before that we

may be starting a new form of cold war, and economic cold war, with china. this seems to be one further step in that. it reminds us what went on with the soviet union. max: it is concerning. control.consolidating it wants power in china. it is consolidating control in asia. it wants to be the power center in asia. it leaves the western world. we are moving into different camps and if we do not be careful, it is going to be a gu;f that is going to be difficult to bridge. knowledge, what would be effective action that the united states could take that would get their attention and say we are not going to do that anymore? we got their attention

because their technology is behind ours. .e sanctioned zte that is their achilles heel, that chinese technology companies are to be sanction, that gets their attention. cfius?enator, what about max: it is a good deterrent. the congress tightened it up. it works well. our problem is is is getting worse and worse. each side mistrusts the other more. after well, that is going to cause problems not just in trading congress but politically. we are going to want china to help us more with north korea or iran and with this widening gulf

, it makes it more difficult. david: will this lead to more support from congress for president trump's approach? president pence is about to give a speech in which he is going to say china is trying to interfere with the midterm elections. max: i smell a little bit of politics in that. i do not see much evidence of china's interference, nothing like the russian interference. it is not something i think china would do. spying on us but i do not think they're trying to interfere. alix: to your point, those remarks from the vice president are released by the vice president and he does say that china uses debt diplomacy to

expand influence. the first stone thrown. mr. ambassador, as you look at relations right now, does china need technology from the united states or have they that they can expand and go on without us? max: they want our technology. they are maybe 10 or 15 years behind the u.s. in the meantime, they're going to do everything they can to no longer rely on the united states. going to develop themselves as part as china 2025. they are going to be less reliant on the united states. david: thank you for your time today. max baucus. alix: also here with us on set is vincent reinhart. it seems like a logical conclusion would be, companies have to shift their supply

chain. vincent: yes, they do. easy, how hard, how do look at something like that? vincent: that is the hard thing with trade. for high tech, a preponderance of things that go into what we use come from china. shifte extent, they can to other areas within the asia-pacific rim but it will take time. sense, the president has fired off the starter pistol for everybody to rethink how to get around in terms of supply chains. some things are easy, soybeans can come from brazil and argentina with little extra cost. when it comes to the chips that go into your specially designed vehicle dashboard, it is going to take a while. david: china has ramped up in the chip area. united statesday,

companies say we are not going to buy any more chips from china. where would they turn? vincent: it is elsewhere in the , it is not because all made in china. it is assembled in china. there are pieces that go back-and-forth to be shipped to the united states. what you have to do is to figure out how to take one of the noeds out. alix: if you're looking at the broader implications of a trade battle, how far apart are we? the white house seems to be looking at this as a shorter-term issue and it seems like china could be looking at this for decades. vincent: it is going to get worse before it gets better. it is the competing ambitions of two presidents. president trump carries about -- cares about reelection.

president xi has a plan that has export led growth, technological export led growth. they need technology. president's battle it out, what happens to the economies? vincent: there are calendar dates, one is fixed, presidential election in 2020. the white house will want something done to say, this was the achievement. the other one is what is happening to the economies. from the u.s. perspective, the issue is about inflation because when we extend the range of goods we put tariffs on and if we do ramp up tariffs next year, we are reaching down to the

consumer price index basket. be a coordinating mechanism for people to say, maybe we should rethink our profit margins. inflation andore of an aggressive type. -- of a regressive type. when you think about the goods from china, they are more likely to be sold at walmart. for china, it is, how do rotate away from exports when you have imperiled your national balance sheet? .hey're going to stop there is a limit to what happens. the global economy, if they decide the thing to do is to depreciate currency, you only poke a stick in the treasury's i and you make it harder for your third countries within the asia-pacific rim. alix: thank you very much.

great to have you. coming up, the tech sector goes on the defensive after china positivist hack attack. -- after china positivist hack attack.

>> this is bloomberg daybreak. coming up in the next hour, bank of america jeep operations and technology officer. this is bloomberg. alix: turning to wall street. three things. silicon valley, gets defensive after bloomberg reporting exposes major security breaches. high sales, after struggling for

returns and three decades behind the screen, john jacobs is closing down highfield capital. the scandal ridden bank says doj has requested information with the criminal investigation. david: i love estonia. joining us is jason kelly. we have this big story. number one. this chip that was implanted. a broader set of issues -- we talked about the global business for them, about cybersecurity. >> spend a lot of time thinking about things that can go wrong and the number one things,, ciber. -- cybersecurity. david: what does wall street do in terms of investments? for their own businesses, they are relying upon cybersecurity

themselves. that is what is so fascinating. reporter: trying to understand where it goes from here. part of the reaction it seems, if apple and amazon, if this happened to them, especially a wall street company, you have to be looking at your system in a whole different way. the vulnerability question is huge. from investor perspective, you have to think -- this now puts a whole different sheen. david: until now, i thought about software hacks. this is now hardware. i do not know how you take apart the motherboard to figure out which it. that -- the chip. detectability, the size, the illustration on the cover, when you see the tinyness

of this, it is remarkable. alix: you cannot blow your free cash flow on security. you have to make targeted decisions. how do you do that when there is a chip the size of a grain of rice? yourter: the other thing, desk was talking about previously and you ask the question -- what do you do from a supply chain perspective. ? each of these companies provides a different investment. sharepoint changes the business model. business and financial implications, just scratching the surface. alix: it is not like amazon can just give more bonuses. second-story, highfield returning money to investors but it does not feel like a return. reporter: it was interesting when this hit the terminal late yesterday,, it bounced high.

you are exactly right. returns were not terrible for john jacobson. it feels like we are undergoing a change. these are very well known names. lee cooperman, the best-known. richard parry on china. these are people who are hanging it up. in some cases it is about returns. know what,ses, you people saying, i am much or i want to do this anymore. david: it is not on the way it used to be fun. reporter: it is not all billions. david: i want to get to estonia. the u.s. justice department is saying -- we would like to talk to you about this money laundering thing, please. reporter: the scope and amount of money, especially in the context of estonia gdp, $1 trillion going through.

david: the $250 billion was only a quarter of what went through these banks. what are the banks might be doing this? reporter: absolutely right. the world focused on this, it becomes a nordic question, and a european question and a global question. alix: regulation and how one country, region will come down versus another, u.s.-eu against each other. david: i thought we cleaned that up in 2008. didn't we? alix: we might have. chartered.andard reporter: this goes back to what we were talking about with iran. all this funneling in new and different ways. alix: where is estonia again? reporter: david westin can help. tune into jason

kelly. bloomberg radio from 2:00 to 5:00 eastern time. chinesethe big hack, infiltration of u.s. companies. this is bloomberg. ♪

♪ the bloomberg report of chinese hardware infiltration of u.s. companies. joel webber, the editor in charge. give us the high points. takeaway,the main when we talk about hacking, most of the time you talking about software. this is different. we are not aware of it. hardware hacking. the story details how china spies infiltrated what is effectively the u.s. technology supply chain, the conveyor belt

that brings us to from china to that was compromised. all of this is based on reporting with events in 2014 and 2015. david: what is the practical distinction between hardware and software hacking? reporter: hardware hacking is incredibly rare. we have never seen anything like this before. it is about access. access to corporate secrets, sensitive government information. it is almost like an invisible doorway that can allow further entrance. firstas perhaps the foray. according to sources, amazon and apple, companies affected here, were able to spot this because of a sophistication they have. alix: they vigorously denied the reporting. what do we know on the china front. ?

talk about supermicro. is a u.s.supermicro company which uses contractors in china. subcontractors were the target. they outsourced stuff in 2014 and 2015, that is where the compromise the place. place. this is a unit that had never been reported on within the pla that specializes in this. david: armed forces? reporter: chinese military, this is a unit of spies, the ship we are talking about here -- the chip we are talking about, there is a lot going on in a motherboard. a lot of people have never seen these. as small as a grain of rice in some places, sometimes smaller. there are different versions of this attack that relied on a

tiny chip being able to become a gateway into a network. alix: joel webber, thank you. a great story. we will be following that throughout the next hour. strategistglobal joining us with a take on the bond selloff and ramifications. selloff after the futures week yesterday, not dramatic considering yields are at highest level since 2011. 3.22% on the 10 year. dollar not benefiting as much from that climb. this is bloomberg. ♪

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highest level in years. investors price in the next leg of tightening. a chinese military unit made chips to embed in servers in over 30 u.s. companies, creating a stealth doorway. malicious chips, were never found -- apple and amazon issued strong denials that the supply chain was hacked. david: welcome to "bloomberg markets," on thursday, october 4. quite a morning. this chinese hack story is quite a story. alix: bond selloff. oil. david: still a big story. alix: corporate bond market, steepening for high yields, supertight in terms of spread. new jersey issued a bonds yesterday, three times oversubscribed. was huge and we

didn't pay attention. alix: we will talk about that. messy close for the s&p yesterday. .utures off 10 euro-dollar, excuse me, 2/10 of 1%. futures selloff in the bond market in the u.s. bunds are up six basis points in europe, perhaps why the euro is getting strength against the dollar. yen down 3/10 of 1%. -- brent down 3/10 of 1%. david: larry kudlow will be speaking to the economic club of washington. at 8:30 a.m., the initial jobless claims report that came after the adp numbers. randy quarles addresses the st. louis fed on the subject of community banks.

the most significant known supply chain attack ever against u.s. companies. chipse hackers implanted in its servers that implicated 30 u.s. companies including amazon and apple. a bloomberg businessweek investigation did extensive interviews. amazon and apple dispute the reporting, so has supermicro, the company that assembled the servers. businessweek hits the stands tomorrow. jordan robertson, the author of the story. for those of us who have not had a chance to read the entire piece, bring us up to speed. oforter: the high points that these are in 2014 and 2015, u.s. authorities and major discoveredmpanies discovered hardware manipulation involving a major assembler of server circuit boards. think about this as a permanent infection on a motherboard.

we know what malicious software is and malware is, imagine if you embed that in a chip and then you embed it on a motherboard. up,y time the server boots the malware a shot into the heart of the operating system creating a stealth backdoor into any protective systems. we reported that amazon and companies some of 30 that discovered the malicious chips. david: i don't remember hearing about the hardware infiltration as opposed to software? reporter: some news has come out in recent years about certain supply chain attack including from china, this is the biggest that has been described. the most significant supply chain attack against american companies. this was a learning curve. we are accustomed to software attacks. sony, equifax, name your big breach, yahoo!, these are software attacks.

hardware is the cutting-edge of the cutting-edge. off,are difficult to pull they require money and effort. only nationstates do them. the significance for u.s. officials of the discovery was that this was a leap forward for china in terms of, china's abilities to manipulate hardware bound for u.s. based companies. alix: we saw some of the verbiage strong. amazon and apple saying it is untrue. what was the reporting from the china side? the response? reporter: the company's responses, we take them seriously. we evaluate them and check with sources, we circle back to sources. for this story, this was a constellation of sourcing, including inside those companies, senior people inside aws and apple that outlined in

extensive detail what happened at those companies. so we cannot force a company to modulate the public statement. all we can do is present information. in response to china -- the chinese government was the one entity in the story that would not addressed directly our fax we presented. that china only say is also a victim of supply chain attacks and it is a robust defender of cybersecurity in the supply chain. alix: thank you for joining us from bloomberg in washington dc. allianz global strategist, when you outline risk, it is political, trade, inflation, how do you factor in cyber threats? >> we have been doing a lot of work around the world on in gauging companies on cyber. we know what happened to

equifax, a huge loss of credibility, fundamental damage the brand and business model. analysts, we talk with companies. we are not time to find out what software they are using or whatever. having been on the email and seen the story breaking, i have been contacting analysts, even with gdp are we have been worrying about how technology adjusts. in europe, if i do not want my privacy threatened, facebook has to destroy data. now we find that there is a chip that allow someone else to watch it. my analyst said one word -- scary. i do not think we thought how this could move forward. is engagement on cyber something we have to get. as customers we take it for granted. all of our data -- alix: i ignore it.

blinders. until something happens. >> then you are joining the nra. david: as you look at an investor looking at different companies for exposure, amazon and apple have denied this. they are so huge. on the other hand, they are more sophisticated than other companies. there are companies that are smaller in terms of data. they will not have the resources to protect their data. as we move online, there is opportunity for scale to outperform. if we were starting a business, we would go to microsoft or amazon and say we want to put it in your cloud. they have to be so robust and say this is not affecting us. otherwise all the people using data services would feel compromised.

is potentially what i would call a cold war tactic emerging. if you are in the supply chain, the government in the u.s. says, we do not like all the manufacturing being done in china and elsewhere in asia, suddenly every american company from apple downwards will have to reengineer -- president trump will say, i have been right all along. you should have been making iphones in wisconsin. alix: he will not buy the s&p because of margins. this comes at a time when you have tariffs on the table, wages are rising and this will bring in the question of supply chains. what does that do to margins? neil: having had 20 years of globalization, apple have been able to cut cost and move around the world, clearly they have to pull some of it back to what president trump calls the

aligned countries. the ever lowering of the cost affecting labor arbitrage is going away. even worse, if jack is right and this is a 20 year trade war, this clearly could have profound consequences. everything investors have been investing with for the last 20 years. david: if all the talk on globalization is true, you have to take down growth. the idea was globalization would promote global growth. we are backing off. we are going to regionalization or nationalization. your company will not grow as fast, your economy will not grow as fast. neil: although it is all speculation, we do not know what the trade deal look like yet, if everyone retaliates, it sounds right, if this sort of story makes america feel more hawkish about sharing technology with

asia, global growth will be affected. they may retaliate. what fundamentally worries me about the cold war effect is countries like south korea, japan and taiwan will have to choose. you sell into the chinese ecosystem? for american? -- or american? asia, 35% in the u.s., those are the major markets that could be affected by this shift. europe, less than 10% caribbean island. -- could be an island. alix: i told you we did not want to get into tech companies. neil: we might win by not losing in this case. alix: you're sticking with us. coming up, more on the hardware hack. this is bloomberg. ♪

♪ emma: bloomberg business flash. eliminate one fourth of its workforce. it is offering buyout packages to 44,000 managers. it is part of a cost reduction program put in place last year. softbank and toyota teaming up. the venture will offer a ride-hailing service for japanese private companies, followed by a rolet of self driving vehicles in 2020. they are trying -- rollout of self driving vehicles in 2020. they are trying to catch up to other companies. the u.s. now investigating a

money laundering case. $235ge portion of the billion through estonia may need to be treated as suspicious transactions. the bank is cooperating. that is your bloomberg business flash. david: for more on the report of chinese infiltration of u.s. company computer systems through embedded chips and what this could mean, greg, horizon investments chief global strategist. i hope you had a chance to look at the piece. how does this read against the u.s.-china situation? we have had issues surrounding trade, but not just trade. how much more difficult does it make this? reporter: it is quite a story. it has to a long people in washington who do not have an easy solution -- alarm people in washington.

relations could get worse. david: the chinese are denying this saying we care about cybersecurity and we are victims of this as well. in the past, have been situations where we have made progress with the chinese? have we haven't gotten -- have we ever gotten them to change their behavior? chip is sotiny cutting-edge i don't think anybody is prepared in washington to deal with this meaningfully other than to stop dealing with the chinese. alix: talking about getting on offense and deterrence, is the result, harsher trade rhetoric? sours the atmosphere. the level of distrust on the part of the u.s., comments from mike pence in the last 24 hours,

the u.s. distrust of china has just gone up a few notches. david: does this galvanize washington? does across party lines as practical? greg: while there was dispute over canada or germany, there is unanimity that china steals our stuff, spies on us, steals intellectual property, technology, they do not open markets. both parties have a long laundry list of complaints intensified by the story you ran. do for our does it relationship with the europeans? they have been concerned about cybersecurity with china before. does it form a coalition? is that a good thing or a bad thing? greg: a bad thing. it further freezes free trade around the world, if you have this kind of suspicion. it was not to disrupt companies.

the chinese want to spy on companies, other country military operations. this is deeply unnerving and does not help the overall global trade outlook. david: if it deters the united states dealing with china, what happens with asia? china has been reaching out isough one belt, one road, it clear which way asia will go? greg: it is not clear. we have a giant that employs tactics like this, it could be easy to capitulate. at the same time you worry about china's desire for hegemony over the entire area. the south china sea. while countries may have to deal assignme -- to deal with china, they feared china. alix: thank you. neil, an immediate market takeaway is buy small cap.

avoid china. trade has been reversing. what do you do? neil: you have to look how this goes on. there is an issue of how you trust china. many companies will have to reevaluate where new products get made. alix: talk about where we are in the trade battle. or until the 2020 elections or a decade conversation? have you allocate u.s. equities for that? neil: a lot of the winners we have seen in the tech sector will have to invest differently to make products. arguably that could create inflation because things will cause more if they are made in the u.s.. the small-cap debate you raised is interesting. the super cyclical parts of the u.s. economy like autos yesterday, housing for the last

couple months, even now the fed is raising rates and starting to slow super cyclical parts of the economy. you are looking for the growth of the amazons and everyone on consumer side to make this happen in the fed is clear -- they are worried the economy is running too hot. the president's fiscal stimulus is bubbling through the u.s. economy and they could be behind the curve. markets are reluctant to price the dots. we could be sitting here in one year, 1.5% higher, interest rates if you look at the fed production. you then try to square what is happening with high-yield and investor grade, tightest ever -- gosh, the way the market is reacting inside equity marketing, bonds and credit, does not seem rational. david: good news. that is what we will talk about next. alix: new jersey money.

david: staying with us. we're talking bond market, u.s. 10 year yields at highest since 2011. what is driving that, next. this is bloomberg. ♪

♪ alix: u.s. 10 year yield highest since 2011. here is the anatomy. ism number.ine is the blue line is jay powell. rates, gradually moving to a place neutral, not restraining the economy. we may go past neutral. we are a long way from neutral. alix: above neutral. the dreaded word. what do you do with a bond selloff that is tempering in the u.s.? neil: the issue is a problem for

the world. interest rates are not that high yet. he knows financial conditions on wall street are lose. -- loose. the ecb will not raise rates, nor the bank of japan for the next all months. these levels look attractive. you have to worry about the cost of hedging, with the volatility of the dollar, rising. alix: investment grade and high-yield spreads are tight. we were joking earlier about $1.6 billion from jersey. why are we not seeing the knock on effect? neil: the u.s. recession is fine. high-yield experts tell me corporate profitability is fine, they turned out the debt, to the point where no one feels the default rate, which is the killer for high-yield, looks

like it will arrive anytime. people are relaxed in buying and holding. the pain is in em and people who use u.s. dollars to fund. david: the way chairman powell talked, he will not quit anytime soon. a chart between the relationship, the fed rate, yellow and the financial conditions. the more they go up, the looser they get. why are things not getting tighter? loan growth from u.s. banks. it is being created by the banking system, which is a differential to europe where the banks are not fixed, therefore credit creation system is hard. as investors, we have been forced to do this. we are now using huge holdings of bonds as collateral. the banks and the financial system is not start of collateral despite tightening

because we are prepared to lend. there is effectively inside the markets, more collateral, which allows financial conditions to be deployed for leverage in markets. alix: it bond yields go higher was up on 15 basis points -- what do you buy? neil: you still have to look at the u.s. it is a safe place to park money. when i get questions about em or asian debt, we have bond funds in asia that yield 10% in u.s. dollars. when you look at, it is all about india, indonesia, china, asia, all about trade, international investors, the headlines will not help the perception of risk of buying into asia at this moment in time. people are waiting on the sidelines. to pick up on something i would say -- $85, russia looks fine.

vladimir putin is laughing. every day his bond market is being refueled with high oil. alix: president trump saying please out more. and then sanctions. -- pump more. americap, the bank of chief technology officer will be joining us, not only with women in executive roles, but we will also discuss cybersecurity. this is bloomberg. ♪

alix: this is bloomberg daybreak. a little bit of softness here. the real interesting conversation is happening in the bond market.

yields dropping from their highs of the day. now only up by one basis point. remember the huge move we saw in the last two days of 16 basis points? now we're up by aboutnow we're . coming off the flattening high of the session. jobless claims are breaking right now. ,000 with the estimate and the survey is 207,000. certainly consistent with the numbers we saw yesterday. the economy seems to be humming along. alix: the narrative continues that the economy is really good. david: chairman powell emphasized that yesterday. alix: you have the we might hike up mutuals. interesting to see the buyers coming in a little bit now and the yields of only one basis point. how good is that jobs number to not disappoint? david: we get to find out

tomorrow. 24 hours from right now we will find out. we want to welcome catherine bessant, bank of america merrill lynch chief of operations. she has just been named the most powerful women in banking by the american banker for the second year in a row thank you for being here. catherine: thank you. david: we have a lot of things to talk about. let's start with this bloomberg story about this hardware hack that infiltrated u.s. companies. i know cybersecurity is right at the top of your priorities. reaction?our initial patio bank of america doesn't have a problem? catherine: cybersecurity has to be at the top of every corporation's list. it is real. when i saw the news this morning my first reaction was, well, third and fourth party risk is

the greatest risk to any supply chain for any company. not just the companies that work with, but the companies they work with. understanding the risk of the lineage of the hardware and software biggest to market, understanding where people are working with what vendors. people tell us all the time we are tough to do business with. i have become private that on behalf of our customers and clients. i don't think it should be easy to put technology into the marketplace. one thing i don't think has gotten enough conversation is the chip. there are other mechanisms for prevention of risk that comes with that. we look at how data moves in our company. if somebody is a resident in our hardware, to they get anything that was important to us? would we know? ing multiplemerg

layers of defense coupled with great tech investment. it is a multilayer defense strategy. david: tesla hack possibility been in your radar screen? we have not been covering stories like this. it is always software and data access, not something physical in the machine. catherine: what this story reminds people or tells people for the first time his hardware risk is real. real manifestations of it that go beyond the hype or the fear that gets generated, those manifestations are very important. it is part of the new dialogue. alix: how you look at it in terms of protection? i talked to three ceo's, utilities, big tech and trucking. we can't spend all of our money on cybersecurity. you could but they can't. how do you determine that? they get think and

challenge is our company gives us an unlimited budget in terms of tech investment and people investment. i always say the most important thing in cyber defense is caliber of talent, the team you put on the wall to prevent intrusion, to detect it, and then mitigate it brilliantly. we've hadhe success in this space in protecting our customers and teams is to the talent we've got. david: what is the role of government in this? when you hear the fbi is investigating this for some time, it may have been communicated to companies, but the you have a great relationship? do they call you up and say, we think we have a problem? catherine: it is a multilateral sharing. the most important role the government has is to mandate the sharing to occur. there is no competitive advantage to secrets in this

.pace, especially regarding risks sharing is the key to prevention and detection. people ask about regulation. i'm not sure is the answer. i do know government has a huge role to play how we share data with each other. alix: we have been talking in different ways of the next cold war in technology. for your experience, how vulnerable are u.s. companies versus other companies in the world? catherine: i think any company, regardless of risk that has a global presence and sources globally is more risk of the company that stays at home. i would say the risk is amped up for global firms in a lot of ways. this scale that causes them to be in existence is important to defend. it does take money and people and it takes really sustain investment over time.

we've had a dedicated information security team centralized with enforcement authority in the company since 2008. david: palace bank of america merrill lynch positions when it comes to trade problems? you have very substantial u.s. deposits. you have international operations. i know you had a china operation that you shut down at some point. are you more or less exposed and edit with substantial globalization? catherine: our customers, the matter what regulations exist, are global. we will do whatever it takes in terms of innovation to make sure we can serve their needs. alix: let's turn to the fabulous award you won. it is not just a buzzword, gender diversity. california is requiring women on board's. what do you think about that? or norway has -- catherine: i don't know if

requirements are the answer. woman i would never look to think they got the job because of a law over a mandate. what i do think is 50% of the people in the workforce are women. 50% of the people to join our company are women. as long is he gets a higher levels of management, 50% of people are women. when 50% of our ceo's are not women we have a measure of progress we have got to make. david: but how do we make it? you have experience in the boardroom. how do we get there? we talked about ability don't see to be getting their. -- there. catherine: 40% of our board is diverse. 40% of our management team is women. 40% of our top 1000. i'm lucky that it's an active conversation. the talk and that

action and dedicated smart people working on gender diversity for decades -- i don't think we are seeing the progress that all that thought to produce. i have been thinking about what should i be working on over the next year. i'm starting to have emerging limites about the and power alley jobs. i don't know i know the answer to the next five years. will we have a doing in the past is not be getting us what you want to go. alix: what is the problem? ceos are talking about it. it is up there. what is the biggest holdup? catherine: i actually don't know the answer. i wish i knew. if i knew, more than one of my direct reports would be to a woman. three myrs ago, direct reports where women -- ere women.orts wher

we are coaching each other's talent. andfocus is the firm ensuring the pipeline is strong enough to produce the kind of results that get us to that 40% of our senior workforce being women. tech disciplines are really hard. we can say 50% of the entering workforce in general is women in u.s. colleges and universities. stem graduatese will be women. from the start in the tech disappointedly under index. i'm fortunate to work for a firm that is all over this. alix: it is great to get your focus on next year. when you look at 2018, what will keep your most at night? catherine: the cyber reports.

i focused every day on cyber. if the board is asking me i would say third-party risks in cyber. change,hink the pace of regardless of its cyber or technology in general, one thing i spent a lot of time thinking about is half the pace of change exceeded the enterprise's ability to keep up with it. i believe there are lots of solutions to that. that will be a huge focus for the firm next year. alix: so great to catch up with you. catherine bessant of bank of america. i'm also saying goodbye to david westin. you have a bloomberg law panel. david: women in full until lawyer who is -- with an intellectual lawyer who is a woman. alix: does anyone keynote not come from michigan? david: all the good ones. brazil heads to

the polls on sunday. we will look at the investing climate in the country. this is bloomberg. ♪

emma: coming up later today, an --lusive interview with this is bloomberg. ♪ emma: now to the bloomberg business flash. shares of barnes & noble are sobering. multiple parties have expressed interest in buying the company. saids & noble says reggio

-- of independent directors. jpmorgan is the latest brokerage to drop us bullish call on chinese stocks. they warned the trade war would only escalate as the u.s. maxes out tariffs on chinese goods. j.p. morgan lowered its recommendation on china from overweight to neutral. express is redoing its gold card rewards. holders of the gold card will forget four points o dollar, twice what is currently offered. they will also get a $125 credit when they eat at certain restaurants. much.thanks so it is the first domino in the global bond market selloff. u.s. treasury yields rising to their highest since 2011. one country we want to focus on is brazil.

is the first run vote and their presidential election. joining us are oscar decotelli -- i got it before in the break. i wanted to point out what your company does. xa investments has about $200 million in brazil. the 17 companies. you have invested in private credit and about 1000 companies. what is the effect of the election from where you sit? oscar: it affects any single country when you're planning or what's will happen to inflation, interest rates. how that will really rollout. onbrazil there is a story the big companies and small and medium enterprises. we have all sorts of different stories. they depend on the kpi's of the

economy. when you're looking under the hood there are opportunities that don't depend on the politics side, but we are all watching this soap opera which is been the brazilian election. we used to have about a month and a half where the front runner was the former president who is now in jail. we have two guys that are candidates, one left wing and one right-wing. we have a situation with the stock exchange happening everyday depending on the results of the newest polls. david: there is a micro in a macro. do you want to touch brazil as an investor? >> not at the moment. whether you get the far right or far left person, it's about addressing the fiscal challenges. they may address the very differently. i think we will need the second vote on october 28 to find out.

i think it is the credibility of that policy. anything could go. anything that affects pensions is not popular. we see it in italy and all these different places. it is hard to see how structural reforms will work with equity in place. with china, trade is not going to help. it makes a lot of stuff for the rest of the world. oscar: this is a private story in a public story. you have talked a lot about emerging markets in general. there is not so much premium to go to brazil. that is true of the public markets. haveu look at the cdf, you 250 basis points more to get to brazil. i think the deal is right in regards -- when you look at private markets, we have been underwriting private credit at 1000 basis points above the yield curve. it's a matter of looking at it. the you look at the u.s.,

growth of private equity and private credit has been a huge mass of money going into it. it is hard for a mutual fund or investor to trade in public markets. alix: what kind of opportunities do you see? i think of lack of infrastructure. oscar: i will give you a simple example. did you know that brazil, sao paulo and rio are the biggest cities for uber in the world. subadra: i did not -- neil: i did not know that. oscar: there's an opportunity there. amazon prime is not present in our lives. amazon is not in the fifth largest population country in the world. they sell books, try to develop more, tried to deal with partners. there is no infrastructure. the way to resolve this is to

find unique opportunities that really have helping to change the landscape. alix: if you go on the ground floor, what is your goal? how much ever return can you make in your investment? oscar: our best investment -- we are still young firm. dog,as a company called sea which does dog accessory companies. we made 12.4 times or money. now it's in 20 different countries, a global opportunity. we are seeing opportunities in health care, education. subadra: i would be interested -- neil: i would be interested in how you manage risk. how -- when you're looking at business models, things to be facilitated, how do you think about the corruption risk inside the companies? oscar: the cleaner you are, the

more premium he will have in your selling. we own the first logistics company in brazil that goes from warehousing all the way to airplanes. we have to go through the approval of the faa back. it took 2.5 years. it used to take six months. how do you do this? it will differentiate yourself. mentality going forward in an environment of corruption that was decorated into the last four or five years. it was there forever. it was a strong cleanup in the last four or five years. neil: do you feel brazil has the stamina? you that argentina and some signs of distress. does brazil have the stamina to cope with the dissidents for the north and south? oscar: great points.

you have the public and the private deals. on the private deals with the one as the u.s. investor? you would stability on interest rates and inflation at his lowest level in history. you want the rule of law. structure has been improved. you are stressing all morning, these discussions of hacks and affecting trades, brazil and south america could be a part of the situation now. what we see is resilient and the u.s. have great relationships. this has to be closer and closer, not something we will get into a trade war with. alix: thank you so much. oscar decotelli. tired.hursday, i'm neil: you are being hacked. alix: really appreciate you coming by.

neil, good to have you here as well. coming up on china's hardware hack, this is bloomberg. ♪

alix: more on the chinese infiltration of u.s. embedded chips. who seesined by vj, this as a positive for nvidia. thank you for joining us. why? >> thank you for having me on. in the near term we don't see much of a disruption of the supply chain. , they buildr term their own servers and focus on security. prefer to use contact servers over the supply chain in china. just increased security focus from buyers in the u.s. could give them an advantage.

and also the moves on the .anufacturing and supply chains alix: doesn't give them pricing power? vijay: using the cheaper supply chains for the contact oem's in china. this obviously could turn the clock back a little bit. alix: the narrative these companies might have to rethink their supply chain distorts in different areas. how quickly can something like that in the industry evolve? vijay: given the volumes that moved to the supply chains it takes a little bit of time to reconfigure those. i think it would be top of the mine for many of these hyper scale oem's, especially given the volume of sensitive data that moves. there is also increasing stakes

and challenges for oem's coming into the u.s. alix: who is this bad for? we saw a lot of shutdown of the outbound m&a from china. them coolhave seen down a little bit differently. we have seen m&a premiums, a group. that has been ahead -- a headwind. alix: that does it for bloomberg daybreak americas. next, jonathan ferro next with the jpmorgan team. this is bloomberg. ♪ is bloomberg. ♪

comcast business built the nation's largest gig-speed network. then went beyond. beyond chasing down network problems. to knowing when and where there's an issue. beyond network complexity. to a zero-touch, one-box world. optimizing performance and budget. beyond having questions. to getting answers. "activecore, how's my network?" "all sites are green." all of which helps you do more than your customers thought possible. comcast business. beyond fast. jonathan: from new york city, i'm jonathan ferro. 30 minutes until the start of trading. this is the countdown to the open. ♪

jonathan: coming up, treasury is getting the move they have been waiting for. saying it's al long way from hitting neutral. bloomberg revealing had china used a tiny chip to infiltrate some of america's biggest companies. 30 minutes away from the opening bell. a bit softer this thursday morning. down 10 on the s&p 500 futures. treasury yields off the session highs. a bit of dollar weakness. story, the treasury bears. >> what has been driving rates is inflation expectations. >> the market is worried maybe the fed will get behind the curve on inflation. >> powell spoke reasonably hawkish yesterday. his