>> from new york city, i lisa abramowicz. "real yield" starts right now. the fed shifting its policy toward the post-pandemic era, fueling an abrupt and violent rotation out of the inflation trade, flatten the curve and taking the u.s. long bond to the cost of 2%. we begin with the fed refueling reflation easing. >> certainly you have to give up

the curve steepening trade. >> the fed is acknowledging with the real-life data that inflation is there. >> dollar strength across the board. >> the dollar should continue to move higher. >> along and that the market is saying it was totally naive to ever think the fed would let inflation get out of control. >> you are seeing a dramatic flattening. >> bond yields have been the driver. >> more disruption in the reflation. >> stalling in the global reflation trade. >> the question ultimately for that trade is where interest rates can go from here. >> no one seems to have the compass about what is going on. lisa: joining us now is a fantastic panel, kathy jones, morgan stanley, and brian railing. kathy, i want to start with your sense about what we saw this week. you were right when you called a bond yield that fell on the long and in the wake of news on

tapering. do you think it will stay that way? kathy: i think in the near-term it stays that way. the reason i hold that view is our history. whenever the fed has pulled back on accommodation, ending q. week, talking about tapering or actual tapering, we have seen yields fall because it sends a signal that we are one step closer to tightening. they take pain to say that tapering is not tightening but the market takes it as a signal that the that is pulling back. that tends to flatten the curve. i think there is room for them to follow a more from here, although i think the reality on the ground is they are very low. to say that they have peaked for the cycle is too early to say but i think we will see bond yields come down may be as low as 1.35 or so, adjusting for the reality of the fed shifting gears. lisa: that is a big deal.

brian, do you agree that we are more likely to go there as opposed to one point 75, for example? brian: in the near term i would agree as people reverse out of those steepening trades. rates are quite low. inflation, if it picks up, even though the fed is watching it, probably a move back above 1.5% on the 10-year by the end of the summer. lisa: michael, you thought the fed meeting was more confusing than perhaps it is being taken. can you explain why michael: the fed has to explain reality. if you look at what they said in march and now in terms of reality, what has changed, growth is stronger, inflation is significantly higher, so they were wrong about the pace of inflation, economic growth. they have to mark themselves to

market. they were too optimistic that rates could stay low all the way to 2024 given the rapidity that things were coming back. i don't think the fed was changing long-term directions. long-term projections in terms of the terminal fed funds rate, terminal inflation rate, the forecast of that has not changed. the pace of which they will get to those numbers has changed but the target levels down the road have not changed. it is more about a reflection of reality. i don't think they are dramatically changing their policy but it is confusing in the sense that they were very ambiguous about this flexible average targeting. how much inflation would they allow over the next year or so? they are not tolerant that much of an overshoot. when powell talks about inflation going to 2.5 percent, that is about all they are willing to go, not more than that. lisa: the consensus for this

week seems to be yield curve flattening. we heard that from matt hornbeck earlier, all of you see that as a possibility with long and yields remaining tame. we saw the gap between the 30 and five-year treasury yield contract dramatically to the least going back to november of last year. yet, there's a question of the message being sent here. how can we look at this and find is consistent with an economic recovery when this typically signals slowing economic momentum at a time when there is a lot of debt and a lot of economic challenges to faster growth? kathy: absolutely. i think the fed has lost the signal and power that they were -- signaling power they were hoping to achieve with all of these different communication tools. this is the conundrum we face. in the near term, we see a

pullback, but in the long term, low yields like this in real and nominal terms are not consistent with a pretty healthy pace of economic growth. the likelihood that we will see more inflation on the horizon, certainly more real growth on the horizon then you would suggest from these low yields. i think we could be into a very choppy market for the time being as the market tries to adjust to what the fed is trying to tell us. on the other hand, with economic data is telling us. the difference in this cycle from other cycles is that wages have picked up, they didn't drop as much in this cycle as they had in the last couple cycles. so we are starting from a higher base. that could give us more in the way of pickup and demand than the market is discounting right now. we are not throwing in the towel on the higher yields longer-term, but i think the signals here are really confusing. lisa: just to pick up on that,

there is this idea, brian, if the fed hikes rates sooner, they avoid a policy ever down the line of having to hike rapidly on the heels of faster than expected inflation. why isn't this viewed as a positive, as prolonging the economic recovery, prolonging growth 5, 10, 15 years? brian: the important thing here is a lot of this rally is driven by

back on that liquidity has implications for all asset classes. that is the market's concern. the fed will be in a tricky position. they will start talking about pulling back on this liquidity. that has negative impacts on the market. maybe it delays what they can actually do, so there is this back-and-forth with the market. the fed will have a difficult time managing. lisa: michael, can you weigh in on that, the idea that if the fed acts now, they could encourage growth more in the long term? why is the market not reflecting that? michael: part of it is positioning, a re-think of large positions on steepening, exposure to the back end of the yield curve inflation have been rising pretty rapidly. they seem to be comfortable with inflation rising as fast as it was, it was all transitory, not troubling. that was the obvious thing to do, focus on commodity prices, equities. even places that were not so great, yields were low, because money had to go somewhere. there is too much liquidity chasing few ideas and those positions had to be rethought. the fed is saying maybe we are not going to be ultra-easy, just very easy, going or word.

you could argue that by acting preemptive now, a risk management approach to central banking, they are not changing their views. on the other hand, there is a legitimate case to be made, looking at the history of the fed, the errors they have made are tightening too soon. are they doing it again? they promise they wouldn't, but that goes against the idea of keeping the economy rolling. they will have to backtrack at some point because they are too optimistic that inflation will be higher and they will have to tighten sooner. lisa: one hallmark of the week is not only the dots, how people brought forward the rate hike expectations, but the growing disparity between views in the different fed members. jim bullard adding to the hawkish tone, i put a starting in late 2022, but you have to have the idea that these are related to what the forecast is. his forecast is 3% in 2021 with

respect to core pce, 2.5% in 2022. there's a question about the disagreement among fed members. i want to get your sense on whether that is leading to choppy or fed policy when you have more varying views, being led by somebody who is perhaps not increasingly in the majority. kathy: certainly, the dots reflect that. there was a wide dispersion on those, they were all over the place. we know there are probably some members of the fed who were never on board with allowing inflation to run a little hot. i think we have already heard from those people. that being said, the people you need to pay attention to at the fed are at the top three or four. pay attention to paul, claire reda, williams, and probably lael brainard as well. those are the folks that i'll be paying attention to.

the rest of the committee is important but i'm not sure that they will sway over all policy. lisa: michael, before we go, do you have a sense about whether your view has changed after this meeting? michael: it has and it hasn't. the fed did something that i was surprised at. i didn't expect so much dispersion at the fed. but it reflects the confusion of on the part of investors, the confusion on the economic community. how much of this inflation is transitory? how much is this going to stick down the road? we don't know. the question is, are you comfortable? this could turn into a more inflationary outcome. jim bullard is saying he is worried, but others are not. this is not likely to turn into a rampant inflation rate. the point is, we will not know for several months.

the u.s. labor market is confused because of all of the support measures in place. we are not going to really know until how labor supply, wages will move until the fourth quarter of this year. in the interim, everything goes and everyone's opinions are all over the place. lisa: much more coming up. u.s. junk bonds recording their longest streak in five months. that conversation is coming up. this is bloomberg. ♪

lisa: this is bloomberg "real yield." i'm lisa abramowicz. time for the auction block. a host of bank deals hoping to push european debt issuance close to 50 billion euros, well

ahead only dealer estimates. u.s. high-grade issuance frontloaded. borrowers coming to the market in the first two sessions. m&a bonanza hitting the high-yield market with junk-bond continuing their longest streak in five months. still with us, kathy jones, michael, and brian railing. were you surprised that the strength of the issuance in high-yield debt, given the fact that we had a hawkish fed, all of those outflows? brian: a little bit, frankly. you have this environment that is really great for yield and credit. the economy is growing quite well. rates are relatively low, so people are looking for yield. in some ways it makes sense. we continue to have the full allocation but it gets harder

every day at these levels. it is difficult to see where you may get some performance in the bond market with a little bit of carrie that you are getting in credit markets. lisa: michael, does it strike you as a disconnect, the strength we saw in pricing amid a backdrop that is perhaps less fundamentally sound? michael: it's a good question. corporate earnings are linked to nominal gdp growth. nominal gdp growth will be exceptionally strong. inflation will be high this year. revenue is linked to that number. corporate revenue, earnings-per-share should be quite strong this year. i would take issue with the fed being hawkish relative to expectations. they are not talking about being hawkish, moving to a non-accommodative stance on monetary policy. nominal gdp is growing at 10% in the u.s. do they knew to be doing qe?

our motto say they don't. it matters for the financial markets in the short term, but in terms of the real economy, it may not matter that much. lisa: this is similar to what blackrock was saying this morning at the open, expecting a pickup and volatility. >> the credit markets are on very solid foundation. the environment we talked about, you are still in a growth environment. certainly a tug-of-war about the duration of inflation, is it transitory or not, how long it'll last, what the policy response is. at the end of the day, you are still in this recovery, you are seeing that with operational leverage. the equality of earnings is incredibly strong. lisa: it is hard not to be sympathetic with this view, at there is so much cash in the system, the fed may be hawkish relative to its path, but at a time of incredible growth, high-yield still looks good. what is the tipping point at which it does not anymore?

kathy: i think we need a change in economic outlook, or a much more drastic move by the fed, and neither of those looks likely this year, to tell you the truth. i would agree the environment is still positive. a lot is priced in. the junk bond market is kinda priced to perfection. it is still an environment where liquidity is widely available, access to cash, a lot of cash on corporate balance sheets, earnings growth is strong. all of those fundamentals are in place. high-yield is completely unfazed by the move in treasuries and the fed meeting. lisa: in the past, high-yield bonds have moved in tandem with emerging-market credit. you think this will bring out given the dollar strength? kathy: i do think over the near term. em definitely is reflecting that dollar strength.

we had a big move over the last couple of days. when you look at the way though e e.m. market is moving, they are looking at the fed tightening. that is inconsistent with what the high-yield market is telling us. lisa: brian, how do you make sense of that, that emerging markets are looking less good at the moment given the dollar, the fact that the global recovery is slowing, even as high-yield remains in what people see as the sweet spot? brian: the current peak place a big part in that. generally, in the u.s., the conditions are, as everyone mentioned, very solid. u.s. investors playing in a high, avoiding duration in emerging markets, trying to be concerned about the currency in emerging markets, it makes sense

that emerging markets is dinged more than high-yield. lisa: is this a time to take advantage of credit, or is it time to get away because the dollar could strengthen more? michael: the dollar could move in the short term. this is countertrend to what the market was anticipating, was positioned, in terms of getting optimistic about emerging markets into the second half of the year. vaccination rates should improve dramatically in many emerging markets. by the fourth quarter of this year, could be the strongest in the world, but the euro zone is kind of taking over in terms of leadership. dollar strength continues, if we end up into a new dollar strength environment, this will be negative for emerging-market corporate's, sovereigns. shock to them, like credit tightening. i'm not sure that the dollar strength will continue to do

this for the second half of the year. lisa: so you don't buy the stronger dollar story? michael: for now, yes. longer-term, no. u.s. economy being exceptionally strong relative to opportunities. the u.s. economy will start doing worse relative to the rest of the world i think in the next 12 months. in addition, u.s. equity markets have been outperforming the rest of the world for years. i think that is slowly coming to an end. u.s. exceptionalism should peter out. that will stabilize the dollar, resuming dollar weakness sometime later this year. lisa: still ahead, the final spread, and rapidfire, and the week ahead. a slew of fed speak with the chairman moving back into the spotlight. this is bloomberg. ♪

lisa: this is "real yield," i'm lisa abramowicz. time for the final spread. fed speak coming up. chair powell testifying before congress on tuesday, plus the bank of england rate decision on thursday, and a slew of economic data including manufacturing pmi's, jobless claims, and u.s. gdp numbers. kathy jones, michael kushma, brian rehling with us. it is curious what we are looking for this week. i wonder if i could get a sense from all of you on what you think will be the most important data point ahead. kathy? kathy: i'm not sure it will be data so much as what we hear from the various fed officials. i think they will be out in force trying to clarify the message. i think that will have the

biggest impact on the market. brian: i agree. the market is on high alert trying to decipher what the fed is precisely thinking here. they will be parsing every word. michael: i agree. we need clarification to what they are thinking about. is this just a risk-management management exercise where they are worried? or are they really worried and that we should expect more dots to move to the direction of sooner rather than later rate hikes? lisa: it is the time you know and love, rapidfire. three questions, three quick answers. will bond yields ultimately rise or fall as a result of the fed's tapering? kathy: fall. brian: fall. michael: rise. lisa: at this point in the cycle, better to be in high-yield or investment-grade credit? michael: high yield. brian: high yield because of the carry.

kathy: high yield, lower duration. lisa: the last question, will emerging-market outperform or underperform over the next 12 months? brian: underperform. kathy: underperform. michael: outperform. lisa: my thanks to all of you for an exciting "real yield." this was a tremendous coda to a dramatic week in fed speak and potential shift in the fed framework, perhaps not. my thanks to kathy jones, michael kushma and brian rehling, on a week of a re-think in the inflation trade. this is bloomberg. ♪

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>> let's get to the first word news this afternoon. canada has extended its travel ban on non-essential travel with

u.s. businesses for another month. the european union lifted travel restrictions for u.s. residents. they added the u.s. to its so-called white list from which non-essential travel is allowed. italy has introduced a five-day quarantine and been tory testing for travelers coming from the u.k.. north korean leader kim jong-un says he is ready for dialogue and confrontation with united states. this as president biden's nuclear envoy goes to the region to build support for a strategy toward pyongyang. it is the first high-level suggestion of talks since biden replaced trump. boeing's 737 max is set to return to the skies.