jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now . coming up, closing out a chaotic august, following a big month for government bonds. growth anxiety lingering with another round of tariffs set to hit next month. president draghi facing down the central bank horse. we begin with the big issue, a month to month for government debt. >> you have a big rally. >> huge rally in the bond market. >> huge inflows, one-sided

trade. >> insatiable demand for yield. >> growth is slowing everywhere. not cutting fast enough to keep up with the falling growth outlook. >> they are actually behind the curve. >> the market is crying out for more. >> we are looking at extraordinary times in bond markets. jonathan: joining me from london is james athey. in new york, greg staples. priya misra of td securities. priya, what a month it's been. the 10 year treasury, people forget, 2% feels like a lifetime ago. it was the end of july, and we are down near one 150. i think it means it is month to month for the entire rally, but what is also interesting, the curve steepening. we have had the 5-30 curve steepen out since the middle of last year. that also flipped in august. this was a bull flattening

rally. this is the month where investor confidence in the trump and fed put were shaken. ,he last 300 billion of tariffs people thought the president onld not initiate tariffs that because it would have an impact on the consumer. that happened in august. fed officials are not talking about easing significantly. even if they were, it is not an interest rate problem. it is not. even if they cut to zero, they could offset all of this growth uncertainty. jonathan: you have touched on separate things. james, many people came into august looking for a bull steepener, looking for yields to drop. they got a drop of 50 basis points on 10's, and a similar move on 30's. canhere anything that you

assign a higher probability to that will change that trend anytime soon? james: afternoon, jon. high probability is difficult. you are talking about inflation shock or the fed gets very aggressive on monetary policy. the conversations we are hearing from jet presidents, fed governors, it feels a bit too in denial about how serious the economic outlook is, and don't seem to be recognizing the troubles we are going to see at the front end. a committee and the like to be a consensus driven organization, 50 basis points or more at the september meeting seems unlikely. for now, i think the curve will stay flat. i still like to own the front end, but i think it will take another hawkish mistake, shall we call it, in september for them to realize the pickle they got themselves into. jonathan: what is to like about a steepener right now? james: good question.

in terms of the kerry at the front and emma doesn't look great. in terms of the value, it does look good. it is very difficult or the curve to aggressively invert in this type of scenario. i can understand why it may flatten and get to zero, but in terms of moving dramatically beyond that it's very difficult, whereas there are number of outcomes were we could see the front end outperform. gregory: we have had rallies in years past but nothing so data empty as this one. this is all been anticipatory. at this point, a lot of august was momentum. maybe it was algo driven. it would not surprise me to see a selloff in september, particularly as we get into the central bank actions, the ecb, the fed on the 18th. what happens next friday if we get a strong jobs number? how does the battery up to that? you have heard a couple members

say they are reluctant to use in july, and now you are calling for them to ease again in september? that could shock the markets. jonathan: what led to the steepening was secretary mnuchin coming out saying that he is still considering ultralong bond issuance. this is what the treasury borrowing committee said in a toy 17. we have talked about this so many times. are most likely to be demanded with those with longer dated liabilities. the committee does not see evidence of demand beyond 30 years. of course, what matters is what the current look-alike then versus what it does now. but the advice, will it be any different this time around? priya: there is demand for the long and but there is not a lot ,f demand at current levels below the 30 year points, from this community.

they will still say the same thing, the treasury does not have to follow the t back. everybody wants a steeper curve. we would all benefit, banks would benefit and a steeper curve. they can try to steepen how the curve by issuing, but i don't know that it is the lowest cost to the taxpayer. how much more are they going to keep issuing? is the demand going to be there at the second, third option? -- auction? is the data strong enough? i think that will dominate. supply can be a knee-jerk steepening. i really don't see this captain demand that is waiting to buy these long and treasuries. jonathan: typically, we look at borrowing costs on the 30 year south of 2%. why don't they go along, to 50, 2 100? what the market has gotten so used to is the predictability of size, a certain maturity, every

single corner. is that what we are sacrificing, james? james: whether or not that is a good thing, i don't know. you are getting into different areas, experiences we have had in the past where predictability lays down the foundation for shocks essentially. essentially, things cannot remain constant. back far enough, the fed wanted to flatten the yield curve in order to stimulate the economy. what i care is what is going on underneath all of this. backis why i like to push on the notion that we have not seen data to justify the rally. payrollseen headline grow slow, -500,000 jobs revision to the reports from march to march.

look outside of the u.s. borders, china is no longer the supplier, the demand that it was, and that has brought the eurozone down. it looks like economies have gotten considerably weaker or absent the u.s. consumer. when they start losing their jobs, and there is early evidence that is about to start happening, then that is when his start to feed off of itself in a negative fashion. for me, the data is what is most important, and that has justified a treasury rally. gregory: i don't think we see the data. we have seen it in manufacturing but look at retail sales this week. we are at 50 year lows for unemployment. i would rather the fed hold onto its ammunition, ca payroll spread that is doubled it is rather than triple digits and then react. right now they are hearing footsteps. jonathan: we have seen the bull flattening come through in

august. what has also been interesting is what is happening in credit. a flight to quality, investment-grade having a fantastic august. bb's outperforming ccc's. is that something we should get behind? priya: i think we should. it is different from the fourth quarter of last year. i read that as a policy mistake. maybe investors are worried about u.s. growth. if you look at the data front, the manufacturing sector is tweak, but we have not seen evidence that this is flowing into services. datave seen global growth being bad, but the u.s. economy is a largely closed economy. so the question is is that filtering into u.s. gdp? investors are saying, maybe we should look at that quality trade. they are buying treasuries, higher grade corporate, also buying the defenses in the equity market. all in all, you are seeing this active management coming back.

that will only extend because global growth looks weak and trade uncertainty is here to stay. we should be loading up on quality here. james, is that an argument that resonates with you? james: i agree with priya. what we have seen is essential you don't go from zero to hero in one step, you don't go from hero to zero in one step. trendrkets have shown a toward more defensive approach to investing. we are seeing in the corporate bond space, suddenly the quality of the balance she is one of the things that is most important that will determine which names you choose. definitely a signal there. you also have to recognize the structure of the markets, the liquidity that has been thrown in by global central banks. that money has to go somewhere. in a low yielding environment, those investors that can take on the liquidity risk, they have

chosen to do so. that has shifted some of the signal value that you get. jonathan: james at the sticking with us alongside greg staples and priya misra. coming up, the two-year treasury auction drawn a yield above the 10 year for the first time since 2007. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." want to head to the auction block and begin in the united states, where the treasury sold at billion or to yield notes wt

a yield of 1.56%, the lowest since 2017. the first time in 12 months to year yield yielded more than the tarrant 10 year at a yield note. likewise in europe, germany sold more than 2 billion euros of 10 year notes were investors offered to buy nearly two times the amount of the securities sold. solid demand despite the record low average yield. italy's selling 4 billion euros in 10 year notes this week, the average yield on the 20 30th on fallen to an all-time low of 0.96%. my italian bond yields can go even lower. >> we are along the italian market relative to germany. we have more spread now than a month ago, so it's an attractive opportunity. italy is something you have to look at tactically. you know it trades in a range. we are now in the top end of that range. we think it's a buying opportunity as a result. jonathan: james at a staples, priya misra still with the. is that a trade you can get behind? james: how did i know you're

going to come to me on that one? i struggle. i appreciate and to some degree agree with the bullish arguments with respect to btp's, i just cannot help seeing the potholes in the road ahead. it is a very tricky situation in italy has to do with, economically, socially, politically, and as a part of this monetary union which is starting to exhibit some stresses which concern me. the ecb is ready to come in and take away all the credit risks they see in the system. but if you look where btp's are trading, it feels like the downside is bigger than the upside. i cannot step in front of the train right now. the front end and started to look more interesting. if you go back a few months, you want to be short two-year btp's. that has flattened out now and it is three or four basis points. when there is a credit fear, the front end blows out.

i don't have a position on the front and right now but i cannot be a blind bull on italy. greg staples, nobody greg staples, nobody wants to be a blindfold on italy. i know that when it drops below 1%, people say, what is going on? a look at the spread of the italian 10 year versus the german ten-year. in the spring of 2015, 88 basis points. we are at 171 now. i know people think we can test those highs once again. gregory: it is all about politics. looks like we have a coalition between five star andy pd. there will be a bit of a honeymoon, the rating agencies will bless the investment grade, the longer-term, they will try to break up the government. they have a difficult budget ahead of them in 2020. i think the coalition is under some stress. longer-term i would be wary. near-term i think we can get

closer to 13.0 on the bund. jonathan: you have to make a call on the government. is it a credit or self risk? that is what divides a lot of people. does it behave as a credit or sovereign security? priya: right now it behave like a sovereign. draghi in 2012 came in and said i do what it takes. i think you'll hear that again. italy is almost too big to leave the eurozone. italy is almost too big to leave the eurozone. it should act as a sovereign. the ecb is also about to do qe in the next two weeks. they will start buying. widening, it is the widest spread. hedge,anese investor, fx italy is the only sovereign bond market that gives them anything more than jgb's. they will be buying.

union no ratings action, we need the government to hang in. how many elections have we had in italy the last 10 years? we have to live with that political risk, but right now as we look for yield, as the ecb is coming in, we should be looking for that spread to compress. jonathan: let's talk about the ecb. the hawks lining up throughout the week. all pushing back not against rate cuts, but pushing back against the prospect of more qe. will their voices be heard next week? priya: i think they will be heard but i think the doves will outnumber them. if you look at what has happened since the last meeting, all the data has been worse. we just got inflation. it is hard to move that higher. inflation expectations have decelerated. everything the ecb had been looking at has worsen. even though the divide is there in the ecb, as it is in the fed,

if you look at the data, i think they will have to ease. the question is can they ease a lot on the right front? points may, 80 basis be the level which the ecb should not cut anymore. so what do they do? they cut 20 basis points and then they cannot say that we are out of bullets, which is why we think they will have to do qe. jonathan: basic case for the ecb september 12? gregory: i think their policy has been a disaster. theirre hollowing out insurance companies, they are making it difficult to fund pensions. they should stop doing that. but i think they are going to. let's talk about the what is their objective with quantitative easing? bunds at 10 year -70. ig barely over 25. what are they trying to accomplish? jonathan: quite remarkable

stuff. greg staples, priya misra, james athey staying with us. we will be talking about china and tariffs. what a month it has been. treasuries, not a massive moves, down a basis point. 1.52. it is the moves on the month that matter. huge moves on 10's and 30's. still ahead, the week ahead, the top of the agenda, payrolls report. that is next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." ons weekend, u.s. tariffs 100 $10 billion of chinese import set to begin on sunday.

monday, markets are closed for labor day. wednesday, we see pmi numbers from china. in the u.s., the beige book drops. adprsday, we get the u.s. 80 jobless claims. this all leads up to the payroll report for the month of august. back with us are james athey, greg staples, priya misra. we had done almost the whole program talk -- without talking about trade and china. i wonder if we are focused too much on the town and not the substance? the optics change every week. through the last 18 months, tariffs have stayed on, and more have gone on on top of that. all ofthat is putting this uncertainty around the business sector supply chains. veryfriday, the tone went negative. the fact that we didn't have a

further darkening of that tone mattered for the broader macro market. if you look at the structural issues between the u.s. and china, we have had the same issues for the last two years, ip, cyber. seeing any progress there. politically, neither side has an incentive to reach a weak deal, so how do they sell this to their own population? what that will do overtime is keep eroding business confidence. at what point do businesses say, maybe we should lower our pace of hiring, do we start paying people less? that is when it will spill over into the economy. you make a good point. until you get resolution, that uncertainty is not coming off. gregory: i think the market is getting desensitized to trump tweets. it is the boy who cried wolf. you need to see some substance.

i could say trump on saturday afternoon saying we are going to pass this on until december, like you did with the other half, but i think the u.s. has to come to the realization that tariffs are here to stay. james: not much new to add, i agree. the market is getting desensitized. the equity market probably less so. they want to see good news in every place it can. the bond market is a bit more cynical. realistically, priya is right. no movement on the true substance of these disagreements, so the rest of it is just noise and sentiment. know the drill, three questions, three quick answers. going into september, who cuts more in september, the ecb or the fed? james: the fed, unquestionably. priya: the fed. gregory: the fed. jonathan: do you stick with quality in credit or do you go

down to the junky stuff? priya: stick with quality. james: neither. you buy treasuries. gregory: stick with quality. jonathan: does anyone think the treasury will issue anything longer than a 30 year anytime soon? gregory: no. 2020, strong possibility. priya: it is a mistake but i think they'll probably do it. james: now, i think t back will say no. jonathan: james athey, great to have you with us, alongside greg staples, priya misra. i will see you in september. same time, same place. this was bloomberg "real yield." this is bloomberg tv. ♪ from the couldn't be prouders

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