>> "bloomberg real yield" is brought to you by pimco. jonathan: from new york city for our audience world wide, "bloomberg real yield" starts right now . coming up, regulatory relief expires. chairman powell pledges to look past higher inflation. how much oxygen is left in the treasury selloff? >> markets are worried. >> could we go higher? >> 2%, two and a quarter doesn't

seem unreasonable. >> expect the curve to steepen. >> you are going to see 10-year rates. >> we have not begun the process of reopening. >> the yield could get as high as two and a half percent. >> march is the month for capitulation trade. >> it is not about the level. >> given how quickly the economy is recovering. >> is what happens to financial conditions. >> it is a green light. jonathan: joining us is kathy jones from charles swab. where did the upside surprises come from? kathy: i don't think it is the reopening. it can't be china. they are showing weakness.

it can't be stimulus. is it more fiscal policy? maybe. we are going to need some really good news that we don't already know about and it can't be another reopening or the virus of the stimulus. it will have to be something else or we will be stock. jonathan: what are your thoughts on that kathy? kathy: i would tend to agree. there have been a lot of optimistic scenarios in terms of the economy. it might give a somewhat higher inflation rate. we will probably get up to the 2% region if the economy makes progress. jonathan: that is the issue good for bond investors, you have to think about deceleration.

how do you approach that inking right now? robert: so far, thinking ahead has been the wrong approach. this market is entirely focused on the current trajectory of the economy and completely discounting any reversion back to the kind of economy that existed before covid, as far as i can tell. the next shoe to drop right to be the last will be when this round of checks hits. we have had a big increase in yields. we have clearly overshot the value for a number of reasons we can go into. but can yields go higher? they can. checks are disproportionately spent and investors could find that concerning since as was

pointed out to the fed on wednesday where long-term interest rates are. that has been the posture and they have avoided that. the markets may test them further. jonathan: this is the most important call to make for the u.s. economy. where do savings go? 's the difference between -- the difference between one could be something up to north of seven. what is your thought about that one particular variable? frances: how the economist hope consumers don't spend their checks because we don't want to see too much overheating. i hear are they going to save or spend, but the number i care about is how much gets you towards deleveraging or paying down debt? we know from 2008 what deleveraging does. surveys tells up to 30% of

checks are being used to deleverage. it is not inflationary. it does not increase growth over time. i say don't tell me how much they are spending and saving, tell me how much is going into the leveraging. jonathan: what is your outlook. the federal reserve says 6.5% gdp. what are you looking for? frances: 6.5% to 7%. nobody cares what the gdp forecast is. we care what the fed is going to do and what washington is going to do. a lot of my colleagues talk about the long-term rates. the most interesting part of the curve is the 30 year and the one least impacted by the fed. 240 was a key level. i want to see if it holds. we need to pay attention to short cycle versus long cycle. we talked about how much good news is in the price. we had a fiscal cliff in 2023?

do we use of our enthusiasm and then peter out? it has well then pointed out we will not trade on that in the next few weeks. if you are a long-term asset allocator, that is relevant. jonathan: it is about the future and beyond 2021, 2022, 2023. we are talking about robert's point, no one is talking about it. what does trend growth look like? kathy: it is not just trend inflation. there has been such a big shift in the focus of fiscal policy and the focus of monetary policy that we are in a place we haven't been in years in terms of coordination and the focus of those policies.

things going predominantly into lower households and places like state and local governments to get employment back. the commitment from this administration seems to be pushing forward in that regard rather than tax cuts. that combined with the fed willing to push the envelope on inflation could mean we have a dynamic we haven't seen in quite some time. that is what makes me think we will look at longer-term fields continuing to move up in the reversion down to the small growth rate may not occur. jonathan: we had stephen major joining us in the last week and he talked about the reopening dynamic, the strong tailwind for high yields and then the secular forces acting as a headwind for treasury yields over time. this is something you have been thinking about for years and years. i want to know whether you and the team at pgim have been

adding is 30 year yield have backed up? robert: i don't think it is cannot be 82020 2, 2023 slow down story -- it is going to be a 2022, 2023 slow down story. once the checks are out i think you will see it retrograde. by the time you're in the third quarter or a fourth quarter, you are going to see retail sales numbers falling back. you may have a boost from reopening, but there is a lot of economic activity going on right now. the cpi numbers have been incredibly contained. i think the core cpi over the last two months is averaging 1/10 of a percent. you had a few height inflations -- a few height inflations in

the last few months but those were in the lockdown stage where you couldn't buy a bottle of rubbing alcohol. but that is behind us. i think we are in that zone. we need to seal yields crest -- we need to see yields crest. like i said, we overshot fundamental value in the next few months will be that phase. jonathan: i think this is probably the most interesting part in the next couple of months is most people won't agree on what the data will look like. this feels like a psychological question and not an economic one. frances: we can show you in any model that is going to down to two and half percent.

why does the market not believe the fed when the fed says it wants to overshoot and it is not going to tighten in response to the temporary increase in inflation? why do we keep hearing the narrative that the fed will be tested by 3% cpi were chairman powell is laying the groundwork the most important part of the meeting wednesday was they incorporated the fiscal stimulus checks in the 2022 and 2023 growth numbers barely budged. they are saying that fiscal is short-term. what i want to know if the fed has to do something about it or the market has to concede. jonathan: that will play out in the next couple of months. why do you think there are so many people who just don't buy the fed? it is in the forecast what they have been telling us for the last nine months and still people are saying no.

kathy: there have been a lot of people who don't believe the forecasts. if inflation out forms expectations, they sit on the sideline. the effect of the stimulus is the neutral rate of growth and miscalculated again, this time to low instead of two high. this is not just about not believing the fed, i think the idea is that if the fed follows through on what it intends to do, the market has to build in some compensation for the risk. jonathan: a really good point. coming up, the auction block. close to setting a new record. we will talk about the slr very briefly. from new york city, this is bloomberg. ♪

jonathan: i'm jonathan ferro. time for the auction block. in europe, the busiest week since january. 27 issuers. 2021 sales 5% behind last year's pace. in the united states, high-grade debt sales with bigger estimates despite selloff in treasury markets. volatility slowing down the high-yield debt market. within $2 billion of the previous march record. back with us is frances donald, robert tipp, and kathy jones.

it was supplementary leverage ratio and expiring. it has not seen a big move in the bond market to close out the week. what was your take on that decision over at the fed? frances: we have been talking about it. the high rates driven by the reopening and all good things and that is the reason rates are moving. it hasn't all been the reflation, otherwise it would be driven by real rates. some of it is expectations. kathy made a good point that this market makes their is more inflation than a lot of what the fed is telling us. the slr has been one of the reasons we have seen this and it has created volatility. today, positioning towards it. i think we haven't seen as much as a move today.

does this actually help us on a go forward basis question are we looking for a one-day impact or multiple month impact. jonathan: kathy, what is your take? kathy: is a good question. we did get a few offsetting indications for revisiting this topic. we have the rrp and the expansion to create a little space. i think this is something that gets addressed over time and a lot of it was already in the market. i don't think over the long run is going to be a long-lasting impact. this is a tough one to parse out because there are so many different pieces of the puzzle. jonathan: robert, can you make sense of that puzzle? robert: in terms of the level of yield, that isn't the problem with the slr. the problem with this is that it

appears liquidity. it basically takes risk-free investments on dealer balance sheets and charges them a premium for that. what we saw in march of last year and what we see during times of crisis is people need to be able to borrow and r epo to keep the market efficient. this is something that looks like you are disciplining the banks and you might have discipline and make sure they are safe, but this is not the place to begin and the time to begin. it will not impact the level of rates but it impairs market. it is unfortunate. jonathan: does that lead to additional volatility and what are you looking for? robert: that is right.

it does in the sense that when futures become mispriced and people want to arbitrage relationships between issues and futures and treasury, having these kinds of constraints on the risk-free parts of this impairs it. within it ends up manifesting itself in decreased market the quiddity, which has become over the years -- market liquidity, which has become a problem over the years. charging people on the balance sheet is not a way to contribute to the market. jonathan: we had a talk minutes after the headline and she raised what would happen with issuance. we are back to the seven year

note story after the ugly auction. we get $62 billion worth. is that a stress point you expect to show up in the next several weeks? frances: we are watching for a host of issues. does the move up impact things like housing activity, financials. we are also work -- watching the market auction component. i also think we will need to see a lot more problems bc -- before we see the federal reserve do something with the rates. ultimately, the fed has three tools are damp emergency policy tools like slrs, those are being phased out. they have to communicate with us that it doesn't mean there is tapering and tapering is not the same thing as raising rates. they will have to aggregate the

difference between these programs and the level of rate. until they do that there will be volatility and nervousness. jonathan: kathy, the final word. kathy: it was a year ago in march when we got the problems in the repo market. i agree that they are going to have to walk carefully around this issue of liquidity. jonathan: coming up, the final spread. chairman powell and secretary alan preparing their first congress appearance. it comes up next. this is bloomberg. ♪

jonathan: i'm jonathan ferro. it is time for the final spread. coming up, and innovation summit

on monday. the fed chairman heading to capitol hill with secretary yellen testifying before congress. we get fed vice chairman on thursday and u.s. personal income and spending numbers on friday. i am please to sate frances donald, kathy jones, and robert tipp still with us. the recovery is far from complete. at the we will provide the economy with the support it needs. i believe we will emerge stronger and better as we have done so often before. we will hear from the chairman three times next week. is there anything left for him to say? kathy: i am not really sure. i think it is simply to call people down and reiterate the fed stance and to provide a sense that we are on it.

we know these things are in the markets and we are in charge here. jonathan: what is left? frances: just repeat it, say it a thousand times. get the front and anchored. -- front end anchored. for now, hold the line. i would like to hear more about inflation targeting and how he will look at inflation in the next year. if he just repeat it 1200 times, that might be the most effective thing he can do. jonathan: what about it robert, he has done it 1200 times and people still don't buy it. robert: this is tough. the selloff we are seeing in the bond market is the bond market believing them, that they will keep the rates low, let the economy run hot and won't exceed the inflation target.

it is very unusual for breakevens to be about an average level of inflation. right now, the cpi is running well below. this is a huge spread and buying from the market. it will keep the rates low. so he has gotten himself into a bind where there are a lot of securities in the work against their own activities by saying effectively that interest rates are low in financial markets are high. they are working against themselves and i don't think they will be willing to change that narrative. jonathan: right outcome of this market isn't testing the fed's credibility. that will begin if we see the strong data with the selloff. the front end has been anchored.

three questions. 175 on a 10 year. where are the next 25 basis points coming from. higher or lower? frances: lower than higher. kathy: higher. robert: trend higher. jonathan: 22, 23, 24 pulling out longer? kathy: 23. frances: 24. robert: 24 or later. jonathan: great to catch up. this was "bloomberg real yield. " this is bloomberg. ♪

mark: kids can sit closer together in a school under the latest guidance from the u.s.

centers for disease control and prevention. the agency now says students can safely sit three feet apart in the classroom rather than six. previous recommendations for installing physical barriers in classrooms has been removed. the cdc is suggesting teachers and staff still maintain six feet of distance from everyone. countries across europe resume vaccinations with the astrazeneca shot today. leaders trying to reassure their populations it is safe following brief suspension over concerns of blood clots. the eu drug regulators assert it is safe and effective and it fell flat in the nordic region. sweden, denmark, norway will not use the astrazeneca shot until local authorities complete their own reviews. germany warning the country is in the grip of what it calls a third wave of rising rotavirus cases as europe tries to get the stalled vaccine program on track. the