lisa: i'm lisa abramowicz in for jonathan ferro. "bloomberg real yield" starts right now. ♪ lisa: coming up, stalling treasury yields searching for a new narrative. and the junk-bond boom wavering after posting one of its worst months since september. we begin with the big issue, stuck in transitory purgatory. >> either bonds are flat.

>> one yield has kinda moved sideways for the past few weeks. >> they are not giving you that big movement. >> no one knows if these inflation pressures are going to prove more transitory or less transitory. >> what you see right now is similar to what we saw in 2012 and 2013. >> nothing is moving. >> the bond market will have to deal with what appears to be transitory inflation. >> bonds as your primary hedge -- >> it will be interesting to see how that plays into inflation. >> this range bound thing -- >> this is a big deal. lisa: that pretty much sums it up, but it is still interesting. joining us now is our roundtable. priya, let's talk with you. it is some inflationary data coming out in the strongest levels and -- in nearly 30

years. are the markets complacent? priya: i believe the markets are concerning the fed too much. they might be a little too complacent here. what we have heard from the fed, they think it is transitory. are we looking at the underlying components of the inflation? there's a lot of supply coming down the road. we have very high deficits this year. we think another $4 trillion will be added. high deficit next year. i worry that if the fed starts to talk about tapering, the long end is going to wake up and the drop in real rates is a little overdone in the long end. i am a little concerned that the fed taking the first step towards tapering will, as a big shock. lisa: matt, do you think talking about talking about tapering will become a problem? matt: i don't think it will be a problem, but we agree with priya

that the move-in rates will be upwards. if we do expect, as priya said, upward tapering, we are probably talking about the fomc meeting in the third quarter. what you saw on the minutes the other week that they were starting to talk about, when they were going to internally talk about the paper, make sense. there are certainly a couple of reasons, real, fundamental reasons why rates are not moving up. the first being the market going down to about 2.3% for 10 years now. the market desperately thinks it is transitory. secondly, if you are a global investor, look at japan and germany. they are at zero or slightly negative, so there is not a lot of choice. we are in the very middle of the range valuation versus german

bunds over the last five to 10 years. we have seen some of the soft data weekend a little. we have seen consumer confidence start to stall out. these higher prices are not being automatically noted, it's with a little bit of hesitancy and they are starting to weigh on consumer sentiment. that's why we have not seen yields move up yet, but we expect them to move up toward the end of next year. lisa: krishna, i am wondering how you dismiss the data we got today, showing core pce data, opinion inflationary metric, was the highest it has been since 1992. krishna: that's not that unexpected when you have the bond coming out of the covid drawdown. that is to be expected. whether it is because of

constraints at a higher demand, i don't really know, or nobody really knows, but it is as not as expected as it would seem. once you trim down the outliers, what does the trend look like? once you throw away a couple of measures, it is looking far more benign then it would be if there would be an inflation uptick on a sustained basis. i think that's what the driver for the market is. the outlook for near term inflation, when you go further out, it will not be at the same level as we had in 2021. it's the markets thinking about things the right way and

reacting accordingly. lisa: take a look at the bank of america merrill lynch move index. it has fallen to the lowest since early this year. it is absolutely plummeting so there -- so far this year, so it could trigger a move to 2% at like priya and matt are expecting? priya: the fed is telling you you can't extrapolate from the data, so we have been happy to stay short until jackson hole. there are two things that can move us out of this and move volatility higher. number one is the 4 trillion package from president biden. that puts upward pressure on growth and inflation, so we will see if that passes. the other component is, when did they really start to talk about

printing? we need to find --. we have tons of treasuries to auction off. i think when tapering is clearly on the docket, that's when rates start to reprice, because we have to bring in a marginal supplier to bring that down. lisa: from your perspective, do you see the increase in supply in the united states has weighing materially on the market, setting yields higher in and of itself? krishna: no. this is a conversation we have had on this show numerous times. defining that level of rates, especially u.s. treasury rates to based on supply and demand alone is not a worthwhile exercise. you have buyers and sellers materialize based on what the policy drivers are at that particular point.

other people who are buying equities today, if things go badly, they will all of a sudden become buyers of bonds. no, supply and demand is not really the driver, but priya made an interesting point, inflation has gone up. really yield -- real yield has gone down meaningfully. i think if it becomes far more prevalent in the markets, real yield will start inching up, and that will be a driver for rates going somewhat higher. not substantially higher, but higher than where they are right now. lisa: that's an interesting point i would like to elaborate on later. matt, you made a point that it will be hard for u.s. yields to rise materially when you have such a backdrop of low yields around the rest of the world. take a listen to what the bank of japan said earlier this week. the chair backed chairman powells need for longer

iteration. take a listen. >> this is based on the condition that it will take time to overcome. as you know, this is also a lesson learned from japan's experience of prolonged inflation. lisa: matt, do you think the u.s. yield bug market could increase materially with lower prices without a commensurate move around the world in japan and in europe? matt: it's possible, but that's difficult. it is certainly difficult. we are at a range now, where we are very close to a five year and 10 year average. we are at a very normal range, so it is certainly possible to get above that range, but it is difficult. some of the socioeconomic, soft data is there.

it is difficult to pick a catalyst, but we do think time is important, waiting through this and seeing us work through the soft data, seeing people come back into the labor force and continue to get jobs. this will not be a one and done, simple move, it will be a move, counter move, move, counter move. it is interesting to see how the fed addresses the data and knows how to play it out. but a lot of times you do see a dip in yields. that's not common in the last 10 to 12 years, when they start to announce the paper, things move, and then things start moving down again. to get back here question, we think we can move slightly higher and it will be difficult

if we don't see a global rising yields. this is not a u.s. only phenomenon. germany is hopefully about to cross positive territory. that's not great, but it is a big move up. the rise of yields has been global, not just the u.s., but if you see that large move continue, it will continue to move up. everyone is sticking with us --lisa: everyone is sticking with us. up next, junk bonds racking up another record. that conversation as well as treasury sales coming up next. this is bloomberg. ♪

♪

lisa: i'm lisa abramowicz, in for jonathan ferro. this is bloomberg realreal -- "bloomberg real yield." in the u.s., unit credit and morgan stanley raised a combined $5 billion on wednesday alone, bringing this week's high-grade tally above $36 billion. and another record for u.s. junk bond sales, recording the busiest may on record with the pace of debt sales nearly doubling since the first half of 2020. investors put nearly 1.5 millions of dollars in deals this week. priya, we added before that you could see why yields might go so much higher. could you add why they might go

higher with this idea of demand for riskier credit cooling? could there be a similar sign from oath? priya: for riskier credit, you wonder if you are getting paid up for taking on additional credit or liquidity risk. for the market, i would say it is a more liquid market. it is safe, but you are taking on duration risk. if the fed is going to start to amount -- by year-end, when we think the fed starts to signal tapering, we might see higher rates because we have a ton of supply, particularly long end supply, so the portion hitting the market is low. with the taper down, you are

essentially asking, could happen in 2021? i think it could. the fed will let us know when the taper tantrum happens, when they give us advance notice. the market is much less liquid today than it was in 2013 and we have a lot more debt. we are much more level. i would argue we can get a taper tantrum if the tapering advance notice happens earlier than what is priced in, fourth quarter of this year, we could get an environment where people stay away from long-duration treasuries as well as riskier assets. lisa: krishna, do you agree? krishna: no, i don't. i think there will be some reaction to tapering. because of the growth outlook in 2022 and 2023 is going to go down materially from what we have seen, that will end up tapering the taper tantrum. the analogy that we are drawing

from, the last 10 years, we don't have the growth outlook where we have growth at the same level we had in 2021. slowing down is probably likely in 2022. the real rates are going to law up some, but i do not think it is going to be substantial and be as much surprise as it would be because the fed is backpedaling a little bit. lisa: matt, what do you think about the fact that we could see another taper tantrum when there is so much cash out there? matt: nothing is impossible. you could see another taper tantrum, but we don't feel it is likely. we feel it kind of already happened. that move from where we started the year, night a basis points -- 90 basis points on the 10 year, that large move up to

where we are now, that felt very taper tantrum-like. we have seen rates move several times with the global financial markets. it worked a couple times, it worked this time as well. anytime the 10 year treasury is that far below the inflation rate that the fed is targeting at 2%, that's an excessive valuation that will at some point correct. we don't expect another taper tantrum, we think that has worked its way out. lisa: priya, do you agree? priya: we are looking for another 75 basis points rise, but i do think the market has become a little complacent about the fed's support staying with the market for a long, long time. as such support starts to get away, i think we can resell off 20, 30% basis points on rates,

then you start to bring in buyers to krishna's point. trades will look better in their are heading properties that there were not -- trading will look better and there are trading properties that were not there last year. lisa: do things look frothy, given the idea that everything is priced to perfection? krishna: if you have been a credit investor, junk bond markets may seem frothy far more frequently than one would expect to be the case. credit investors move in one direction. either they are buying or selling. i think the junk bond market,

valuations are reasonably stretched. if you are asset allocation requires you to buy junk bonds, you don't really have too many other options that you can go out and explore that meet the criteria. the point i'm trying to make, yes, markets seem thrall fee -- frothy, but don't use that to divine which way spreads are going. they could remain frothy for a next ended period -- for an extended period of time. lisa: i thought you were going to say it is longer than you can keep your head in the market. up next, the final spread, and chairman powell and the fed. that's coming up. from new york, this is bloomberg. ♪

lisa: i'm lisa abramowicz, in

for jonathan ferro. this is "bloomberg real yield." time for the week ahead. u.s. markets close for memorial day weekend, and the oecd publishing its economic outlook. in rba rates decision coming out tuesday, the fed beige book, and ppi rates on wednesday. thursday, another round jobless claims out on friday, closing out the week with chair powell and the u.s. payroll report. still with us our our guests. i want to dig more into where there could still be value. we have been talking about the doom and gloom and i wondering from you, matt, where do we have the greatest potential opportunity? matt: it's difficult. to elaborate on krishna's point, i would not use the word frothy, but it is high-yield and fully valued. looking at the market, it is business cycle based, so as we

come into the upswing of the economic cycle, we are moving their very fast. triple see that right now is trading at approximately 6.5%, 6.25% yield. that is excessively missed out in our opinion. we think the right way for investors to think about it, if you want to be tilting to being slightly short duration and the guilds aren't fantastic to overweight spread products, high-quality spread products, if the 10 year treasuries are 1.621 prince own percent, it doesn't seem fantastic, but that's a huge percentage of your treasury yield that will eat up much of your time. lisa: i want kristen to get an answer and. where is the greatest value yet -- krishna to get an answer in.

where is the greatest value? krishna: probably in the fx. it is not the fixed income, but em currencies can go up in the current environment and the economic outlook, the growth outlook is actually increasing. my vote would be for em, fx, far more for traditional fixed income markets. lisa: priya, what's your response? priya: long end inflation expectations. the front year is perfectly priced. those inflation expectations are doomed to rise. if the supply chain disruptions last longer, that will be the part that will move higher. lisa: time now for the rapidfire round, three questions and three quick answers. is the high-yield bond market poised for a blow up? starting with you, krishna. krishna: no. lisa: matt?

matt: no. lisa: priya? priya: not right now. lisa: which is the worst pain trade? treasury yields falling to 1.25 ? and going forward, what is the bigger risk, investment greater high-yield credit? priya: high yield. matt: high yield. krishna: high yield. lisa: thank you to all of you. it was a fascinating week, remarkably dull in terms of yields move, but very interesting when it came to inflation expectations. from new york, that does it for us. this was bloomberg "real yield." this is bloomberg. ♪

look...if your wireless carrier was a guy, you'd leave him tomorrow. not very flexible. not great at saving. you deserve better - xfinity mobile. now, they have unlimited for just $30 a month. $30 dollars. and they're number 1 in customer satisfaction. his number? delete it. deleting it. so break free from the big three. xfinity internet customers, take the savings challenge at xfinitymobile.com/mysavings or visit an xfinity store to learn how our switch squad makes it easy to switch and save hundreds.

♪

amanda: this is bloomberg markets. i'm a man. matt: and i'm matt miller. -- i'm amanda lang. matt: and i'm matt miller. amanda: a little bit of inflation out there, matt, but nothing that is bothering markets. we have tech in a leadership role once again today. matt: it looks like we are getting some budget headlines right now. check out your bloomberg terminal, and you will see biden'budgets headlines rolling across. $6 trillion has been telegraphed for fiscal year 2022. it looks like the budget assumes real gdp growth of 4.3% next year, unemployment of 4.1% next year a