>> berg we -- bloomberglisa: bls starts -- real yields starts now. investors are keeping and i on the g7 summit in england with treasury yields heading for the biggest weekly did line in almost a year. weekly decline i'm a -- weekly decline in almost a year. >> the bond market is telling us

inflation is transitory. lisa: finally, markets are trusting the fed. these transitory price moves >> doubled increases in airfares and hotel costs. >> when will they peak? >> the biggest risk is if we start to see wage pressures go up sustainably. >> everybody is screaming, there is no inflation. >> there is some inflation that will stick. >> i do not see a bond market reflecting transitory inflation. >> it really does not matter if inflation is transitory or persistent. it matters what the fed thinks. >> that is where the debate is in the market. lisa: i would like to start with you, marilyn. the question i have before the great inflation debate is, can

we get any message from the bond market or is this purely a reflection of said policy? -- fed policy? marilyn: i think it is partly a reflection of fed policy, but it is also a reflection of many market disciplines that think inflation is transitory -- many market participants think inflation is transitory. but, how transitory is it? i think the bond market is telling us they do not expect too much from the fed. i do not think we are expecting anything concrete. in terms of messaging from the fed, i think the market is sanguine in terms of not expecting them to announce too much in terms of interest based. i think the bond market is telling us they expect inflation

to be transitory for now. for the time being, investors are focused on trying to get yields for the near future. lisa: is the bond market right? bob: i think the bond market is 90 91 hundredths percent. i do not think that accepting a -90 basis point on the 10 year treasury makes any sense at all. when you listen to people speak, you would think that the 10 year treasury was 2.5% to 3%. nobody in the bond market wants to own it unless i have to. every so often, shorts get frustrated and squeezed out. that is what we saw yesterday. james: i do think there is a short squeeze going on.

we talked a couple of weeks ago and discussed the fact that probably the biggest risk for the bond market was lower yields because the market was positioned very short. i think bob is right about that. from an inflation standpoint, i think the market is sending a message that if you look over the last year, almost the entirety of the yield increase has been in higher inflation expectation. it has not been in higher real yields. i think it is incumbent on the fed to pivot policy to see real yield move higher. lisa: bob, if you are right in the market is not a good barometer of how people actually believe, is it right for -- right --ripe for a potential surprise? bob: bond yields are anything

the fed wants them to be. right now, they want the 10 year where it is. if you want to coinvest with the fed at this point in the cycle, if i could go back to what bob merton said decades ago, that is the equivalent of picking up nichols in front of the steamroller -- picking up nickels in front of the steamroller. at some point, the fed will say, there is inflation, we will start tapering, we will start raising rate. a lot of folders of debt will start to get flattened. lisa: so, shorting the 10 year ahead of next week's fed decision might be the way to go. the fed can start talking about conditions and timing. this should come as a surprise to markets priced for a dovish fed. marilyn, do you agree? you think the market is set up for a surprise?

marilyn: i am not sure we will see yields rise dramatically following next week's meeting. i think we will see the 10-year somewhat higher as it is now from here. the risks are certainly to the upside in terms of expectations laid out by the fed. however, our scenario is still that we might not see one rate increase brought forward into 20 23. but certainly, risks are growing that we will see more. if you see even a couple more members release a rating expectation, the risk is higher. i think overall, we will not see anything dramatic next week through the rest of the year -- next week, but through the rest of the year we will see yields go higher and messaging coming through. i think the risks are not so

dramatic, but we will see it eventually this year. lisa: jean, what is your view? jean --geb --gene: i think marilyn is right talking about tapering. they could surprise us. what we have seen so far is when we see days in the market when the fed is talking about paring back purchases, we see inflation expectations fall and real yields increase. i think that will continue. inflation at this point is ultimately driven by two things, what is psychology and the other is pricing power. -- one is psychology, and the other is pricing power. on the psyclogy side, we have seen inflation expectations rise and then become stable. today, expectations became a

little slower. from a pricing standpoint, that is critical. we hear from companies that analysts talk to that they believe they have the pricing power to pass through higher input costs on consumers. the question is, does that continue into the fall? lisa: bob, i know you say the bond market is not necessarily an accurate barometer. i want to understand better the international aspect of the u.s. bond market. foreign buyers have been coming in. there is plenty of bid. you have the ecb and other central banks remaining as dovish as they can be. there is a question of whether u.s. yields can rise even if there is inflationary pressures that pick up more substantially. or, will we see more negative real yields given the fact that the international picture is low yielding? bob: lisa you are right.

central banks globally are ganging up on the treasury market. what is really missing from the conversation is just how much is the 10 year yield being distorted by the amount of q. week? -- by the amount of qe? i think about 100 basis points is right. they are doing about half the amount of to eat --qe as 2009 and 2010. you can go back to 1992 and see what that looks like. how much of that is the fed? i think three quarters of it. i think the other quarter is the influence of central banks. lisa: marilyn, do you agree? marilyn: i agree with bob at the

central bank is having a huge impact on bond yields. yields would be significantly higher given inflation. i think going forward for the rest of this year, if you look at other areas of the bond market, the performance of yields, flows going in to cee-lo's -- clos, investors are moving into other areas of the market. there is just an insatiable demand for yields whether it is a broad or domestic investors who just have liabilities. i think the bond market is being significantly distorted. lisa: we want to elaborate on the credit market as yields fall to near record lows. we will get there in a second. coming up, we will talk about yields at record lows. investors are beginning to rush

to new issues in the primary market at a record pace. this is bloomberg.

♪ lisa: i am lisa abramovitz. here in the united states, strong demand from -- for 10 years stealing the spotlight. high-grade issuance are nearing $36 billion in the wake of the decision to unwind corporate credit. rising consumer prices are fueling the fire.

it also was another blockbuster week of auctions with the sale of a $500 million offering for bitcoin. marilyn watson, bob michaels, and jean put it so --gene panuzzo are still with us. gene: there is definitely froth in the market. bond yields are plummeting to the lowest levels ever. it speaks to the backdrop we just talked about, central banks are causing yields to evaporate from markets. investors are finding yield wherever they can find it. right now, there is a shortage of income producing assets. the asset class has been a beneficiary in a bit but sweet spot. fundamentals are strong. default rates are coming down quickly.

it is amazing in an asset class like i yields how allowing companies to extend maturities can reduce the default rate. we have built a bridge. now, earnings are coming down. i think investors have become comfortable with high yields. but, history would tell us that investing in high-yield companies, particularly credit -- triple c's with these credit spreads tends to have about outcome -- a bad outcome, particularly after 12 months. we have been cautious in the triple c segment. what we own their tends to be significantly under yielding broad market. in the high-yield space, we would prefer shorter maturity as a higher-quality alternative. lisa: bob, what is your view? bob: like everyone else, i wish

i could buy high-yield at 6% or 8%. i can't, it is at 4%. i am hanging on for dear life. i think credit spreads are going at least 75 basis points. you have a lot of work on the high-yield market. we have done a lot of work on recovery rates. i think a lot of clients are surprised that travel and leisure companies from a year ago that went through restructuring, the recovery rate was over 100 sent --cents on the dollar. we have not begun the normalization process. we like high-yield here. we are about to see it explode to the upside. there will be some involuntary deleveraging of a lot of companies. lisa: what do you mean? that seems like a credit negative?

is it a credit positive? bob: it is very much a credit positive. over the last year, corporate america has filled his coffers with ultralow borrowed funding. they have issued debt. but yield levels, they never imagined they could fund themselves. so, the debt is on the book and we have seen leverage ratios higher. as the economy opens and we start to get the revenue come in, when we model what capital looks like, it is a tidal wave of cash coming into these companies. so, they can increase dividends, but they are going to pay down a lot of debt. lisa: marilyn, do you agree? i hear what everyone keeps saying, that we are in a good part of the cycle, but, when you take a look at how tight spreads are you see dividend recapitalization and things like borrowing money to buy bitcoin, does that get you concerned?

marilyn: so, i think when you look at the returns of high yields from year to date, that goes back to our earlier conversations around a huge amount of demand. i think we have reduced overall, some of our high-yield allocation in our global accounts. we have increased allocation to higher-quality investment-grade or the high-yield stack. valuations are extremely tight. we can see that we have more volatility. investors are still jumping in, trying to access those little polyp -- pockets of yields wherever they can. we do still have allocations of high-yield, but we have overall reduced them recently.

lisa: what has been your reason behind reducing select positions? marilyn: it is based on valuation. when you look at the huge amounts of liquidity in the market, when you look at where it is going, the fact that the u.s. economy is doing incredibly well, we have been talking about not so much coming from the fed in the next few weeks and overall inducing. eventually, the fed will let us know they will be tapering. we are already gearing up for a continuation in economic data.