jonathan: live from new york city, bloomberg real yield starts right now. ♪ coming up, he knew restrictions cloud of the outlook making progress toward substantial progress, and real yield sitting fresh record lows. we begin with the big issue, hitting supply-side headwinds. >> it's about workers. it is about inputs. >> higher input costs. >> inflation on our input costs. >> on the one side we have this

growth of recovery. on the other side, we have volatility. >> the micro indicators are different from what the macro models are telling me now. >> most of these bottlenecks will be overcome. >> most should ease into the end of the year. >> if you listen to companies, it is very different. >> of course there will be some hiccups as we restart the economy. >> the functioning of the labor market, we don't know enough about. jonathan: joining us to discuss is marilyn watson, lisa coleman, and ashish shah. lisa, i want to start with you and talk about q4 and september. a lot of people are waiting for this supply-side response to the economy. how can we have any confidence about the outlook without seeing that first? lisa: our view is still unchanged. yes, we have had some bad news

coming through, but at the end of the day, we think the economy is still on track to recover, notwithstanding the gdp printed we saw. the components we have, the reopening is still in place, will take some time, but it is happening. the consumer is in great shape. disposable income is high. inventories are low. those will be rebuilt. we think we are on track. we will just continue to see the economy slowly come out of this slump. jonathan: marilyn, do you agree? marilyn: i think we are continuing to see things built up from low levels, past supply-side constraints. the labor market is proving challenging in terms of finding actual labor to fill many of the tasks. if we overcome the supply-side constraints, continue to see supply chains improve, we will see a robust number.

it is very strong and continuing to improve. jonathan: ashish, what is your take on this dilemma? ashish: we are seeing the early signs of labor easing in the states where benefits have started coming back, where there is strong underlying demand. in our view, it bodes well for the fall where some of those constraints will be coming off. i also think we have to take a step back and say we have been on this v-plus trajectory and we cannot expect that to be the next year or two. we are coming out of the v, going into more of a normal growth cycle, which will be constructed for markets, particularly for credit markets. jonathan: the treasury market, at the moment, i cannot explain

any of it. seemingly, chairman powell cannot either. i don't think there is a real consensus between the last meeting in this meeting. can you explain the move from 150 to 11260? ashish: it is not whether growth is good or not but what is the pace of acceleration? globally we are seeing a deceleration of that v shape into a normal growth cycle. the second aspect of growth, delta variant is reminding us that this pandemic is not over and that we are going to have varying points of recovery, rather than everything going back to normal. when you add in the technicals of summer being a shortage period of duration along with policy stance, which will opt for taking stimulus away so they

can be slow in taking stimulus away, all of those things add up for a lower, flatter curve. jonathan: 1.23 on the nominal yield. is there a reason we are at negative 1.17 on the real yield? marilyn: it doesn't make a lot of sense to us. -- lisa: it doesn't make a lot of sense to us. when we look at where the real yield is, it just seems too low. frankly, the only explanation that makes any sense to me -- and i am not a rates expert -- it just seems the weight of cash to news to the market, whether in treasuries or corporate bonds. as long as central banks continue with quantitative easing, just the sheer weight of money is pushing down nominal yields. this seems to be having an impact on real yields. the only explanation i can come up with. jonathan: marilyn, i hear a lot

of observations. negative yields, 1.20, all-time lows. i will ask them why but i don't get any. they may say, very liquid market, the fed owns a quarter of the tips market. what you are looking at is driven by technical factors, don't look too much into it. marilyn: i think lisa made the point, the market is awash with liquidity. we didn't hear much out of the fed this week. we heard the ecb will resume for longer then potentially expected. a huge amount of liquidity, asset purchases that are still being offered by various central banks. it continues to weigh on markets. there's is a huge amount of cash sitting on balance sheets. it needs to be put somewhere. a lot of institutions are just trying to find somewhere to put

this cash, so it is going into treasuries, the bond market. i think that is what is causing these problems. maybe in jackson hole we will hear more from the fed around the potential to taper. there is a huge amount of liquidity. jonathan: are you expecting the same thing, ashish? ashish: i take a step back and say that we are expecting the same thing. if that is looking at the economy and saying, things are a lot better than 18 months ago, when they put in place a lot of these policies. at the same time, we have to keep an eye on the big picture. there are a lot of people retiring, a lot of liability demands. the demand for safe yield is insatiable. you are going to continue to face a demand-supply imbalance

for higher yields. higher yields will be bought by pension funds, insurance companies, in volumes that will be -- any issuance we see in the marketplace. when you see these backups in yield, remember there is not enough yield in the market. the problem is that there is too much yield in the market. jonathan: so why would expect yield curve to steepen anytime soon, given what you said? ashish: everyone has gotten blown out of the steepener. now the consensus is slower growth. in europe, if anything, we have seen policy move in the opposite direction from and expectations perspective from the u.s. the u.s. said we want to withdraw liquidity.

in europe, the ecb said we want to be more accommodative than you thought we ever could be. that leads to a relative steepening in europe relative to the u.s. that is a real change in the marketplace from and expectations perspective. jonathan: you have all got calls related to europe. marilyn, short german duration. walk me through that. marilyn: when you look at italy in particular, we have seen a widening in recent weeks. overall when you look at the ecb confirming that they will be a massive backstop in terms of buying bonds, keeping rates low for a long time, we think they would go for compression between italy and germany. italy is also one of the largest beneficiaries of the recovery fund. in terms of gdp, economic

activity, italy is accelerating in terms of growth, performing better than expected. we think that will continue. not just italy but spain and portugal, they improved above expectations today. we think that will continue. over all, here is a decent amount of spread compression we can see between italy and when you look at bunds, the relatively negative yield, we think that they will be going higher before the end of the year. jonathan: optimism around the panel on europe. lisa, you think on the european backside, take me through the thinking. lisa: i don't know if today was the best day to do that given we just got the stress testing. it just confirmed our views on european banks, that they are incredibly resilient.

banks have come through the pandemic really well. the asset quality is good. we are starting to see a release and reserves. what is important is the amount of capital built up by these institutions. as we have gone through this most recent stress test, the results we got today, we saw a drawdown of about 500 basis points. in and of itself, may seem severe. but when you look of a starting point of capital for these banks -- again, this is a severe stress test -- they come out well with about 10% of capital. we feel confident. in addition, because of this excess capital they have, they can, without difficulty, pay coupons, which is the holy grail for owning at1's. we think it is one of the most attractive investments out there. ashish: thanks to the new utilities, you want to own utility bonds in these banks.

banks are not in the business of taking credit risk anymore, capital markets are. we believe it is an equally attractive trade in the credit spread universe. jonathan: up next on the program, the auction block. apple going back to the well. that conversation is next. this is bloomberg. ♪

jonathan: live from new york city, i'm jonathan ferro. this is bloomberg real yield. a month and sales going smoothly at this week's treasury

issuance. only the seven-your offering seeing a drop in demand. believing the charge in high-grade debt markets. pushing weekly sales above forecast. high-yield markets coming to life following chairman powell's news conference. july's tally to roughly $29 billion. backed with those are marilyn watson, lisa coleman, ashish shah. you don't have to comment directly on apple if you don't want to, but for a company with that much cash, tapping the debt markets four times since may of last year, what is behind that activity? lisa: without getting into too much detail on apple, they have the stated cash of being that cash neutral. this is a company that accumulated off a lot of cash. about $90 billion in free cash flow per year. it makes sense they are coming to the debt market to achieve that goal. what is interesting about the issue, good for them, at a blended rate, achieved about

1.6% funding. for companies that can grow at that rate, why not? it's a great opportunity for you. jonathan: they keep saying why not? the reason i asked the question is because i'm trying to work out whether we are in the so-called golden era for the credit market, whereby the c suite manages the balance sheet for the debt holder, more than the equity holder. that is how people thought things would play out 12 months ago. have you seen any of that discipline? ashish: we are seeing what we would describe as midcycle. this is probably one of the fastest cycles we have seen, where we went from recession all the way to risk-taking behavior being more normal. i would think about the credit markets as a carry trade from here rather than a way to generate returns that are quite material. people are looking for yield.

credit markets are a fine way to get good, safe yield in your overall portfolio. jonathan: marilyn, your take? marilyn: certainly, the markets are favorable for issuers like apple. there is a huge wall of the men investors looking for carry, ield. we have seen a huge uptake in the u.s., europe as well. four companies that can issue rates in this environment, that makes total sense. when you look at the earnings, the forecast going forward, apple continues to invest in their business, continue to invest in technology. i think it makes sense to lock in these low rates, look forward to the future and continue to invest in the business model. jonathan: a lot of people have,

to this program and picked out bb's and bbb's, and they have talked about the upgrade potential of the bb's, defensiveness of those bbb's. is there some opportunity still, given i've been hearing about it for so long? lisa: i think there is still opportunity there. you look at earnings in the way they are coming up for companies -- and i want to comment on deleveraging before i get into bb's. some of the work we've been doing, which is showing where revenues are coming in, where ebitda is coming in, even under some assumptions for moderate growth and overall debt, u.s. investment great companies are going to deliver were t -- de-lever whether or not they want to. we are seeing about have a turn to almost a full turn of leverage coming down for the median investment great company. that is powerful.

why that is also pertinent to what is going on with some of the rising stars, there is a whole host of than. without getting into too many specifics -- well known in the marketplace -- freeport, forward , craft, netflix, all of these companies are benefiting from the recovery. given the way the credit metrics are coming out, within the next 18 months, we should see a slew of these conveyed move back into investment grade. jonathan: leverage is coming down. on the equity side of things, this bull market has been so heated for so long. this credit run we have seen develop over the last 12 months i think is equally hated. distressed debt guys didn't have their window. the fed closed it for them. since then, spreads are this type. but no one really talks about what lisa just talked about, the fundamentals of these credits

are getting better and better. default expectations have been going the other way, not the wrong way. walk me through that from your perspective. ashish: one of the things that lisa highlighted is the power of those low yields in the marketplace, how they lead to cash flow generation for any borrower, whether corporate, sovereign, or a consumer. when we think about it, spread product in general is naturally de-levering at even higher leverage levels. that tells you you are on a strong path of credit improvement with a backdrop that may involve tighter spreads but improving underlying fundamentals. as a fixed income investor, you love to hear that. you especially love to hear that with this background noise of we are going from a v of steep growth and the fear of

inflation, to more moderate, positive growth, which is a fantastic environment for fixed income. jonathan: i want to talk about the risk of sentiment and whether that could come from china. everyone will be sticking with us. coming up, the week ahead, including the payroll report here in the united states. that conversation is next. this is bloomberg. ♪

jonathan: live from new york city, i'm jonathan ferro. this is bloomberg real yield. coming up, china pmi on monday. followed by the bank of england on thursday. another round of jobless claims on friday before the payrolls report. marilyn watson, lisa coleman, ashish shah. china, huge focus on china when it comes to ipo's on the equity side.

maybe this starts to bleed out. the transmission mechanism for what is developing in china into dm, u.s. credit, what is it? marilyn: overall, there will be a mechanism between china and the rest of the global economy. i think it is less in the short term that we were expecting. a huge amount of volatility this week. china grows at a decent pace. we know they have the 6% gdp floor. we have seen them come out and be more dovish in terms of rating back the language, regulation in certain sectors. we have seen the pboc is prepared to loosen monetary policy in the short-term. actually what we are seeing is china is shifting, shifting the economy into a longer-term

stable position. while there will be a bleed into dm and more so em, it will have an impact in the commodity producing countries. jonathan: lisa, your reaction? lisa: i agree with marilyn. it is interesting, one of my colleagues based in china says that we get these disruptions every three years, so we are on target. essentially, we have a government that is aiming for greater economic and political stability. i don't think they have any interest in disrupting the economy. marilyn is right printing the pboc and their actions. i think it will be relatively contained, don't really see a bleed out into the broader economy globally or into dm. jonathan: ashish shah, final word. ashish: i see two huge opportunities coming out of this. you can buy chinese government bond etf's and take advantage of

the policy easing that china will inevitably be putting into stabilize their economy. second, asian high-yield, you have the baby with the bathwater trade. you can buy bonds with 10% yield that you will get paid back on. that is an opportunity in the marketplace that you cannot find anywhere else. jonathan: alongside lisa coleman, marilyn watson, appreciate your time. that does it for us this week. this was bloomberg real yield. this is bloomberg. ♪

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ed: i'm ed ludlow with bloomberg first word news. the biden administration is expected to impose new sanctions on cuba today in response to a

recent social protest on the island. officials say curves could include providing internet to the cubans. mass demonstration took place earlier this month in havana protest shortages, power outages, and government policies. former president donald trump pressed top doj officials last year to declare the presidential election was corrupt, despite no evidence of fraud. notes released by the house oversight committee detail a phone call exchange with then acting ag jeffrey rosen and his deputy richard donahoe, in which trump said, just say the election was corrupt and leave the rest to me. the report is the latest example of the former president's attempt to delegitimize the election. thailand's prime minister has rolled out tighter containment measures to quell a region covid outbreak. however, he hinted there could be an extension of quasi lockdowns