>> "bloomberg real yield" starts right now. jon: coming up, america facing an expensive reopening. economists are struggling to read incoming data and the fed insisting policy is not a good -- is in a good place. we begin with a good place, no one said reopening would be cheap. >> you are looking at post-pandemic era -- >> we see a major shift in the supply demand dynamic -- >> pent-up demand is with

pent-up saving and reopening -- >> forcing companies to provide hiring incentives and wage increases -- >> there is a premium to be paid -- >> this is putting businesses in tight spot -- >> damage done now -- >> supply issues are temporary, demand issues are temporary -- >> pricing power will be sticky -- >> once you raise wages, it is hard to cut them -- >> they can either decide the payout now, -- >> we are having the surge in economic activity -- >> or they can wait -- >> you have shortages, supply chain interruptions -- >> the reopening trade is accelerated -- >> the demand is coming back now. jon: the demand is back in a big way. joining me now is -- that line there, no one said reopening would be cheap, a line from wells fargo's share house -- sarah house. we are finding out it is expensive to get things going again. >> we start with a price tag in terms of fiscal stimulus. you had 4% signed into law when trump left and there is 9%,

massive numbers. once you combine the pent-up demand and excessive saving and the fact you do have not only labor mismatches, some structural issues, and obviously very crucial supply chain bottlenecks, you will have higher elevated inflation that we've seen since the late 90's. the million-dollar question is, will it get out of control? even though there is a higher probability it is happening now since the 90's -- 1990's, we think it is a one in five probability that multiple quarters will have 4% plus. jon: i want to take on that point of high probability. but the question many are asking, whether the high prices lay the foundation for sustained price increases through the year. do they? >> thanks for having me on. let me say that, when we think about sustain -- sustainability

of prices of the future, you really need to get the expectations component and household reaction function to respond. we did get some evidence that households are adjusting higher, their expectations for near-term inflation. even the five to 10 year ahead inflation expectation gauge did rise, that we have to keep in mind the preliminary report. in our analysis, we find it takes much longer period of time of price increases to get people to expect higher prices in the future and drive their consumption behavior today. as we saw, higher prices in the near term is bad for consumption, as we saw in the retail sales report. jon: we see something similar in the consumer confidence numbers from the university of michigan. what is the base case for you? >> we think inflation readings can be high for the next handful of months. we are not sure how long these

readings, these high readings will be sustained. we think even when these transitory factors rolloff, we think there is a case for somewhat elevated inflation readings. we do not think we will suddenly go back to the sub 2% pci readings we witnessed for the past decade. we think maybe they come down to the 2% to 2.5% area above the fed's target but higher than what the markets have been used to mainly because we have these easy monetary policies and expansive fiscal policies putting money in consumer's hands. that drives prices higher. in the short run, we will probably see elevated prices for a bit. we think he can come down but down to the 2% level is higher. jon: i want to point -- return to the point, troy, there's a difference between a policymaker and market participant. i've said that through the week and i theme you -- and i think you agree. as a market participant you have to constantly analyze the risks.

it is clear based on the data over the last couple weeks that you have to do that. troy: 1000%. even you go back to this year, we were not sure if we would get -- let's take the counter back to december 25, would we get another stimulus under trunk, with the vaccine rollout go well because it was botched? would we get another stimulus under whoever controlled the next senate? the risk of poor economic outcomes basically went from 20%, 10%, to almost nonexistent. the risk of an inflationary outcome from 5% to roughly one in five now, that is why you see the recalibration in markets. he saw yields going higher, growth stocks selloff, commodity sensitive areas rally. so that dynamic process will continue, but, at the end of the day, unless you get labor inflation, and most of the jobs coming back online now, even with pay raises, which is great to see, our lower wage jobs.

they may actually have an effect of pulling down wage growth, and since labor is 55% of the economy, unless you get sustained wage growth for an extended bang uptime, it is unlikely we see anything like we had in the 70's -- 1970's. jon: adding to the confusion, it has been a hetrick of big business, payrolls to the downside, and then you have the third one came a little earlier when retail sales were down by surprise. why are we struggling to gauge what is happening? even when you look at how wide economic expectations are in the surveys we do at bloomberg, you are still seeing on the likes of payrolls huge misses. matt: absolutely. data is volatile in the most normal of times. and these are not normal times. it should be expected the data will bounce around and leave us more confused than offering us clarity. this is exactly what the federal

reserve is expecting out of the data. they are expecting to get a confusing set of data. this is why they want to wait to collect as much data as they can to give them the most clear picture of the economy as they can. that will take longer than the bond market is currently priced for. i recall two months ago, investigators were talking about 3 million payroll gains over the next three months. here is two months later, and we barely have one million job gains over the two months. it is going to take some time for the economy to really show its true colors, but we should be expecting volatility to the upside and downside. jon: let's talk about what the analysis means for this market. this is what greg peters had to say on treasuries. greg: the rate move is largely finished here. you know, we are still pretty constructive on this.

we think the curve will flatten. i think there is pressures around that happening over the near term, but i think the near term is difficult. i think longer-term is easier. we see lots of opportunity in treasuries over the medium to long-term. i think rates are too high and the natural rate is lower. jon: colin martin, three points to make it, greg peters thinks the move is done, two, rates are two high, and three, the national neutral rate is lower. on those three points, do you agree with any of them? collin: i agree that the neutral or natural rate is likely lower than what we witnessed in the past. we disagree with the first two points. we do not think rates are too high, and we think the next move up will be higher for yields. we have seen them stall for the past year or so and we think that was natural. yields rose sharply on natural expectation. now, we are at the point where

we see expectations into outcomes. but we are also in this really funky environment where we don't know how to read the numbers, because we have the basic facts, the stimulus, where it is difficult to get a read on. over the long run or this year, we think yields should fire, we think the tenure can get to the 2% to two per -- 2% to 2.5%, but we might be in this holding pattern as the markets digest the info and see economic data come in going strong -- showing strong growth and inflation. jon: matt hornbeck, your reaction? matt: i think in order to get the 10 year yield above 2% this year, you need to price that policy in a much more aggressive stance in the fed is currently willing to adopt. our view is that you can get interest rates to grind higher, but we are not expecting rates to be where the market implied forwards are this year.

essentially, maybe 10 to 15 basis points higher over the course of the year, but if you bet on that, you will not make money. ultimately, we agree with greg that, at the end of the day, you want to buy treasuries, but you want to focus those purchases on the areas of the market that offer you the best roll down. that is not the long end of the curve at this point. we think that five to seven your sector of the curve is really where you are meant to be. jon: final word, troy? troy: speaking with clarity and a market where no one makes a living calling back ends of the treasury curve. a lot of definitive statements in a lot of gray data points. we were just talking about elevated inflation and the fact it is a higher probability than it has been for a long time. we have had steeper yield curves coming out of the financial crisis. there's no reason rates can't trend higher in the short to medium-term.

no one really has definitive grasps over how soon or powerful the long-term forces of disinflation reassert themselves you can say about being long on the back end of the curve as it serves as a potential hedge for a terrible economic disappointment. it will be hard to make meaningful returns. and you certainly have a higher risk of yields going meaningfully higher in a range bound market. it is not a great trait.

jon: what do you think the reasons are we struggle to take out the march highs on treasury yield, troy? troy: let's start with the fed. again, we have had steeper yield curves, but when you're not going to move the front-end, the bribery going on, for people to buy the long end and roll down, is a mess. you can certainly go to 200 to 200 basic powered by over 2700 journalists and analysts in more than 120 countries. powered by over 2700 journalists and analysts in more than 120 countries. -- 200 basis points plus. .3, every bond market participant over there career has enjoyed the long-term forces of disinflation. is this cyclical bear market going to turn into a cyclical one -- cyclical one? market analysts are willing to live with short-term market to market to capture low long-term disinflationary trend. jon: same question to you, matt. matt: i think one of the reasons we have not made highs since march is because expectations of 3 million jobs in three months, we now have expectations building for 350 to 90 basis point month on month core cpi. it is expectations are high. at the end of the day, when all of these risks that we are talking about are already in the price of the marketplace, we

should be looking at risks that are not in the price of the marketplace. those are obviously difficult to foresee, but at the end of the day, the risks we are all talking about, inflation, it is in the price. jon: matt hornbeck sticking with us along with collin martin and troy gayeski. next up, a blot inflation print calling to bond the 30 year auction. this is bloomberg. ♪ ♪

jon: i'm jonathan ferro, this is "bloomberg real yield." time for when we kick things off in the united states. amazon's headlining supply selling $18.5 billion of notes. just 10 basis points

equivalent of treasury. i nafta take the markets to new records. first half of supply about $220 billion, and inflation nerves weighing on sovereign, a softer 30 year treasury auction. matt horn -- back with us is matt hornbech, collin martin, and troy gayeski. troy, not enough conversation on europe. the italian 10 years cleaning through 1%. just want to know how you are gauging in the european bond market? troy: there is still more uncertainty on the recovery there, and you have the never ending outcomes of the nations like italy as a whole. you and i have talked about this many times over the years where, from an investing standpoint, europe also this of -- always disappoints, yet the pandemic is as well. you see more divergence, sovereign bond yields, then you

have seen in quite some time as italy in particular will need more and more fiscal help because the domestic situation there is so problematic. >> does this unlock any potential for further moved to the upside? you mentioned you think we have priced in the inflation story on the treasury side. what about a shift higher in yields in the core of europe? matt: it's a really good point because global bond market investors are assessing all of their options at any given moment. it is clear that when you look at where treasuries were relative to german bund at the end of march, they look extraordinarily attractive. now, that spread has compressed a decent amount and it looks like it could compress even further. the question is, does that happen with yields continuing to move higher, getting the 10 year yield above the euro? or does it occur with treasury yields coming down as a result of some of the inflation fears priced into the breakeven markets being taken out? i think the jury is out on that.

you do not have a particularly highly convicted view of that particular spread at this moment. i say certainly the reopening in europe is proceeding, vaccination rates are better now than in the united states. there is scope for optimism in europe, but we have to remember, central banks are tugging on the others of the rope and trying to keep interest rates low. jon: just a couple comments in the last 10 minutes or so, are you becoming more bullish on treasuries? matt: when i am bearish on treasuries, it is like pulling teeth. it is tough to get me beared up but i was earlier this year and late last year. i was saying, at this point, we see enough value in the treasury markets, given the uncertainty and whether the red's dovish reaction function is -- the fe'' s dovish reaction function is. we are focusing on carrying rolldown strategies because you have to make money somehow.

that is the way we think you will make it. jon:jon: how do you respond to that, collin? collin: when we look at the international markets, if we continue to see sovereign bond yields entire, that gives little scope for treasury yields to move higher. if you look at the tenure -- 10 year boon getting close to zero, it has been negative for a while, we think that could give u.s. treasuries a little with. as always going to be some sort of spread but as we see other yields slowly rise, that can boost our yields. when we look at europe, they are finally making progress on the covid and vaccination front. they were trailing the u.s., and if we can get better growth numbers there that does boost yields, that would provide upside for hours. jon: your mandate takes you beyond or fixed income. [laughter] i bet you are grateful for that. 10 basis points over on a two-year treasury or 2-year note from amazon.

i should call it a two-year treasury. we have a credit priced like a sovereign. when he saw the numbers, what were you thinking? troy: look, i mean, if you are a bonilla fixed income manager focusing on credit attempting to add value, good luck and god bless. things are so tight, and certainly the expectations have come down dramatically, as they should. almost all of the data or spread compressions occurred. you have record low non-loss adjusted yields, close to record low loss suggested yields. the only area of fixed income if you are concerned about making high digital returns is still instructor crush -- structured credit, but they are 100 to 150 basis points into better economic outcomes. it's one of those periods where, for investors, they can go across capital structure or region, or asset class.

if you want to make high single digit returns were better, you will have to live it with market to market volatility, select areas in equities, and we have a meaningful bitcoin position on, talk about volatile. but that is the only way you will put up meaningful returns because fixed income credit is an exceptionally opportunity core environment. jon: what you just had a minute to go, i want to sit on that to wrap up this program. the idea that we may have had all of the spread compression this early in the cycle just makes you wonder how in earth you describe the cycle. how do you characterize the cycle we are in right now if, this early on, you have had all of the spread compression already, at least in the mind of troy? matt: we have been characterizing it as price for perfection. the sector of the market i like to look out to highlight that is triple fees. spreads are tight everywhere in credit. if you look at triple fees, you get a spread of 5% or so.

if you look historically at triple fee one your default rates, they still default even in really strong economic environments. that is the nature of a risky company like that. with a 5% spread, you are getting almost no compensation for the risk of even a low rate for that part of the market. it is priced for perfection. when you look at the higher rating parts of the market or of jahnke, we understand why spreads are so low. the economy and the environment is so supportive for credit right now. strong economic growth, improving fundamentals. we understand why they are this type. we don't see much room for compression going forward. jon: a final word from matt's because you have been doing the word on the cycle. from an economics perspective, we are just getting started. from a markets perspective, this is early. matt: that's right. our view is the cycle will ultimately end up being hotter but a shorter cycle than the one we just came out of. that is not hard, given that was

the longest cycle we have on record, but nevertheless, we think we are kind of transitioning in market terms into a missed cycle environment. our chief u.s. equity strategist has been vocal about this. we think we are in midcycle market for various asset classes. nevertheless, from a global microstrategy perspective, we think risk assets should continue to do relatively well as bond yields remained stable at these low levels. jon: always great to get your views on this program. matt hornbech, collin martin, troy gayeski. still ahead, the week ahead featuring the fed minutes and another busy week of fed speech. that conversation next. this is bloomberg. ♪

jon: i'm jonathan ferro, this is "bloomberg real yield." time for the final spread. the week ahead, featuring a ton of fed speak with the vice chair

monday followed by the president. -- the various presidents throughout the week. we will have a look at the fed minutes up wednesday for that. most of you know the answer for that. new york city reopening and lifting all restrictions on indoor and outdoor businesses. then, initial jobless claims thursday, and we rounded down the week with a host of global market pmi's. from new york city for our audience worldwide, that does it for us. see you next week. enjoy the weekend.

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mark: house republicans have chosen new york representative elise stefanik as their number

three leader, replacing wyoming congresswoman liz cheney. stefanik is a starch defender a president trump, and there is discussion of what trump's role should be in reshaping the future. >> president trump is the leader they look to. i support president trump. voter support president trump. he's an important voice in a republican party and we look forward to working with him. they were elected and sent here by the people of their district. they are part of this republican conference. we are unified in working with president trump. >> congresswoman stefanik was elected with a 134-46 vote in a closed door meeting following a last-minute challenge from a faction of republicans who say stephan nick is not conservative -- stefanik is not