i have no >> bloomberg real yield is brought to you by pimco, globald income. >> the new york city audience, worldwide, bloomberg real yield starts right now. coming up, treasury yields picking out to new highs as washington passes a $1.9 trillion plan. economists racing to upgrade their forecasts. yields hitting post pandemic highs. >> we are going to see continued volatility. >> unprecedented fiscal stimulus. >> explosive growth. >> we are seeing the steepening

of the yield curve play out. >> the economic backdrop is improving. >> the fed is going to have to sound more upbeat on the economy. >> yields are low. >> yields need to go higher. >> at what point does that become difficult? jonathan: let's start with that, is the path of least resistance for treasury yields still higher? >> when you see the backdrop, this norma's amount of fiscal stimulus coming through -- this enormous amount of fiscal stimulus coming through, when you look at the economic data that has seemed decent overall, when you look at the overall backdrop of the vaccine rollout, the opening up of the economy getting back on track, i think the fed is going to try to play

down expectations, they are focusing on the mandates of unemployment as well as the inflation target, wanting to repair the economy, but in the overall backdrop, i think the market is considering to price rates higher. jonathan: it is amazing to compare and contrast what is happening in the united states with what is happening in europe. looking to europe, italy is about to go into lockdown again and we are talking about high yields in america. what does that mean for the rest of the world? >> that is a good point, we should not look at just the real yield rise. if you estimates are going up, it puts pressure on other baits to go up in europe. we saw an ecb meeting where christine lagarde addressed this and they are going to increase the pace of their emergency purchase program and essentially, what we have to understand with europe is as

yields rise, they don't have the capacity to do a lot of fiscal stimulus, whereas the u.s., we can say we are having these relief packages going through, which are good and that can get other asset prices moving higher, but europe does not have that. they cannot do as much fiscal stimulus, so a rise in yields in europe is a tightening of what they call financing conditions. they are going to have to play pretty safe and try to increase purchase programs such that those yields in europe do not rise too high and create a premature tightening. jonathan: i'm trying to understand the optimal way of thinking of this. either treasury yields keep drifting higher and take the rest of the world with it, or we get that dispersion turning into divergence. how do you think about it? >> good to be with you. i think it is going to be divergence and the reason for that is these fundamental

drivers behind that divergence, with the u.s. has mentioned already, the economic data has been solid and the vaccine rollout has been better than what we have seen in your copyrighted europe is dealing with -- in europe. europe does not have as much fiscal stimulus and they have structural components of their economy that make it more difficult to achieve growth. all of that leads to lower rates for longer than what we are going to see in the u.s., we are here, we are recalibrating to this much better both vaccine and economic growth. jonathan: i know you are thinking about this, also divergence within europe. can you peg me the picture you are expecting to materialize this year? marilyn: we are seeing increased divergence within europe as well

and we have improved our overall view on the u.k., we think the likelihood of having negative interest rates from the bank of england are significantly diminished given the rollout of the vaccine, which has been very quick, given the data. it seems like they are at the end stage of this current lockdown and opening up the economy by the end of june. if it happens, it will be positive. we have seen a die down of the uncertainty around brexit. i think in other areas of europe , it is more dispersed -- dispersed. we have a positive view given the fundamentals from where they are now in terms of the money they are going to get through the recovery plan, the prime minister is going to push

through reforms. we will see compression between italy and germany. we are seeing at the ecb, which is doing its best to keep financing costs down, and that means keeping borrowing costs for governors -- for governments down. jonathan: quite a lift in yields in europe. have we seen the capitulation as far as the u.s. economy is concerned? i mean we are about to have a massive boom in america. i have seen several forecasts, the oecd out this week, lifting expectations by one full percentage point. have you sensed the capitulation yet? jim: i have not sensed it yet because the news continues to get better but i think you are getting onto a good point, which is that we are getting to a point where these positive

surprises are going to start to run out of steam. if we go back to the start of this year, we had a positive surprise in terms of the vaccine , all these things have gotten better, growth has gotten upgraded, retail sales have gotten better, the employment numbers we expect to get better. all of this is great. unfortunately, this is becoming old news. effectively, by the second quarter, we should have fully priced most of these surprises that we had now and even potentially some in the future because i expect the jobs data to be good. soon, we are going to be talking about an infrastructure deal. we just signed a relief package, now stimulus -- and there is a difference --this was a relief package. this new package coming up will be stimulus. all of these things are going to be socialized in the markets over the next couple weeks and

couple months. i think there is going to be a culmination of this in the second quarter and that is where i expect yield to reach their peak and once that happens, i would argue that the traditional, standard global reflation trade can start to take place and also a little bit of a reprieve for europe. jonathan: you need to be thinking about the additional sources of surprises. maybe it comes from policy, from d.c., maybe they can do more. do you think they can? tony: i don't think d.c. can necessarily do more than $1.9 trillion. the infrastructure package will probably be over 10 years so in the near term, it may not be that large. i think you will see increase for growth, probably the biggest one is next week when the fed has to upgraded their forecast on growth. what i think you are going to see is 2020 was about financial markets and the equity side pricing in advance of the recovery.

a lot of spread sectors did that as well. as we go into two to 21, spread sectors are priced for it -- 2021, spread sectors are priced for it. investors are not going to be able to enjoy those double-digit returns from high risk asset classes that we saw over the last 12 months and now we are going to have more muted returns. jonathan: we have to talk about the fed response. up next, the prospect of a little extra yield. that conversation up next. this is bloomberg. ♪

jonathan: this is "bloomberg real yield."

we look to the treasury issuance this week. the anticipated 20 and 30 year options coming and going without any fireworks. american airlines doing its part to keep the high-yield market active, putting monthly sales on track for the busiest march on record. the high-grade market belonging to the right this week. back with us, marilyn, tony, and jim. let's for -- let's look forward to next week. is there any reason for the fed to be concerned about financial conditions? marilyn: i don't think there is a huge reason for them to be concerned in that financial conditions remain, particularly in the u.s., real yield is still negative.

you have this huge stimulus from the government. i think they are not going to signal any change in their current policy. the market is looking to see what the economic projections will show, looking to see whether the median estimate or forecast might bring forward tapering. we don't think that is going to happen. potentially a rate hike in 2023. probably unlikely at this stage. at the moment, there is not a huge amount to be concerned about. it will take some time for the fed to move in a different direction. jonathan: the gdp forecast without a doubt will be upgraded. we will see upward revisions considering what we have seen

from wall street over the last several weeks. for me, it is going to come down to the corresponding move we might see in the dot plot. what do you expect that to look like? jim: gdp up a lot, unemployment down, inflation up maybe 1/10. right now, you have five dots in 2023 so you have to have four shift to shift the median in 2023. i think you will get a couple. they will begin to acknowledge moving sooner for the first tightening, may not shift the entire dot plot, but i think they need to navigate carefully this idea that higher rates are healthy for the markets if they reflect solid growth and modest inflationary pressures reaching the fed's target. higher rates do not create a reduction in negative feedback

loop to financial conditions. jonathan: walk us through that. jim: i think no question there is going to be an upgrade to growth, there might even be a slight upgrade to inflation. there is one thing i am looking for. what does the fed do with their expectation for the first rate hike? we don't expect any liftoff or policy rates moving higher until late 2023, but this is a test to the fed's credibility. whenever we look at 10 year yields, we have to recognize that it is a math problem. how high can yields go, while part of the math that goes into that is what is the pace at which the fund rate is going to increase? if we don't think that liftoff starts until 23, if we get a

message from the fed that it might start earlier, we are going to recalibrate and those yields are going to go up and i can cause a premature tightening of financial conditions if that yield right is perceived as too fast. really, what the fed needs to communicate, because it is a test to their credibility, that they are not going to move, that they are going to be patient. that is what i am looking for the most. if they move off of that, there is going to be something to do. jonathan: the test would be the doubting of the fed and that is if we see blowout data and start to see movement at the front end. last friday, that was the test, the first test. for me, where things get interesting is in the next couple months, when you start to see inflation shift higher, we expect it, cpi is going to be

higher, gdp is going to be better. we know that is going to happen. for me, it is not a question of economics, it is psychology. how market participants respond to this, how they adopt do what happens with policy. how are you two's -- how are you set up to navigate what could be a choppy next six months? marilyn: we have seen, after the market be choppy as it has adapted to the change in expectations, we are going to see better data in terms of gdp growth, we will see inflation to cairo a little bit, -- inflation tick higher a little bit, but we still see is huge demand and huge amount of cash that needs

to find a home in terms of return and yelled and i think we are going to continue to see that demand -- return and yield and i think we are going to continue to see that demand. we are going to maybe see more dispersion as -- in terms of where investors are placing their money. when you look at inflation, i don't think you are going to see inflation accelerate to much. we will see it tick higher. as economies open up, but on the other side, we are going to see this suppression in terms of demographics and technology. i don't think we are going to see inflation shoot up but we will see it rise slightly

higher. jonathan: you can see how everyone is set up at the moment . do you worry everyone is running to the other side of the boat too quickly? tony: it is becoming a crowded trade, you make a great point, that limits maybe some of the upside because people are already positioned for it. but i agree it makes sense. the way we try to approach that in terms of the spread sector is don't be at the maximum of your wrist budget so that when you have -- risk budget so then when we have volatility, you have some patterns to take advantage of that, at some risk because we think that admit quality credit world is going to outperform. jim: it is a procyclical story. some of the quality trades have been working but what has really

been working is the reduction in interest rates sensitivity. if you can head out the interest rate sensitivity or the duration but you can take the credit risk, because credit has been holding up pretty well, and that is where the money is being made, but you have to watch out and hedge for your duration. jonathan: still ahead, the week ahead featuring a fed rate decision. that conversation coming up next. this is bloomberg. ♪

jonathan: this is "bloomberg real yield." coming up next week, two big pieces of economic data coming on tuesday and thursday with tail sales and jobless claims. plus, a fed rate decision on wednesday. then the bank of england on

thursday. the bank of japan on friday. i wanted to finish on something important that takes place in the next couple weeks. it is a big i decision that needs to take place before march 31. i am sure some of our viewers in fixed income are aware of what happened last year around the supplementary leverage ratio, allowing people to hold more treasuries. can you walk me through what you expect to happen in the next couple weeks? tony: it is a negative technical for the market if they don't extend that exclusion for treasuries. banks will not be forth to sell immediate lead because most of them still exceed their minimum ratios, even if you've a move the exemption, but they get closer to that minimum and they don't like being that close to it. at the margin, it will either reduce demand for treasuries at

the front end or because some selling. that is going to at volatility that the fed is going to have to address through liquidity measures to make sure that you don't have instability in the front of the market. anchoring that front and is key -- end is key to fred credibility. jonathan: do you think it is having an effect already and you think it expires month end? jim: i don't think it expires month end, i think the fed is aware of this. he saw what happened the last time rates went up in the curve flattened. that was negative. i think the fed wants to avoid that premature tightening, especially on the technical thing that they can change on their own. i think the technical aspect of putting more treasuries apply into the front end during a period of time that you have

relief packages and stimulus packages that may be forthcoming, that could create a tightening of financial conditions that i think would work against a lot of what the fed is trying to achieve. i think this exclusion will be extended. jonathan: it is an important topic and we will spend next test time next week on it -- we will spend time next week on it. what do we see first, 2% on 10's or 1% on 10's? marilyn: 2%. tony: 2%. jim: 2%. jonathan: high-yield spreads, around three to five. what comes first, 350 or 400? jim: 300. tony: 300. marilyn: 300.

jonathan: christine lagarde had a question for europe, can they engineer a recovery that lights -- that leads to higher interest rates. an ecb rate hike or the end of her eight-year term? tony: the end of her term and probably the next governor as well. jim: i will see a rate hike. marilyn: maybe a rate hike. jonathan: i appreciate your time . from bigger city, for our audience worldwide, same time, same place next week. this is bloomberg. ♪

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