>> this is bloomberg real yield. it starts right now. jonathan: the ever grand debt is starting to worry china. we begin with the big issue -- treasury markets. >> they are going to taper sooner. >> the flatten the curve is an initial response. >> it is a yield curve. >> fed meeting.

>> an initial reaction. >> we have seen a market reaction. >> we have started to see you in the past couple of days. >> it is in a rational move here. >> the yield curve made a lot of sense. >> it is a technical deal. >> we look forward to the 10 year yield to continue. >> if we break that, there is not much in the way of 145 and 2%. >> [indiscernible] >> 145 on tens. that is the change. we have an awesome panel. kathy jones. you are first. what is behind what we have seen in the demonstration of the market at the back and we? >> has less to do with tapering as the release over the china situation.

it looks like it will get resolved in a way that does not produce a lot of contagion, and that was weighing on the market. the big picture story is that inflation is above the target rate. the economy does not need sharply negative real interest rates, and the market is coming around to that point of view. >> lisa, what is happening here? >> i agree with the view that the market is coming around. the fed was very clear, in terms of providing us with a roadmap. as the taper begins, and we are around the middle of next year, we will have a volatile. of time. it may end of 22, it may be 23. we will start the process of normalization. given our view that the economy will continue to do well, we think that rate should be moving higher. i will give you the 10 year yield.

we expect 175. it makes a lot of sense. >> does that make sense to you? >> i think you have to get to the question of what is driving the martian this week. -- market this week. we have to talk about what is going on and what is been driven by the stimulus. last year, we had a spectacular surge in growth on the stimulus that drove yields up to about 170. people began to wonder, you have fiscal headwinds, and the stimulus is dropping off. you saw activity leveling off and falling. you saw lower home sales, which maybe was constricted by biden, but but it will fall for a handful of months. that took us from 170 down to one teen. in addition to ever grand, there

is acceleration. we have acceleration in the economic data. on the housing side, and in the retail sales, it begs the question -- if fiscal is already tapering off, and going into a negative space, if the fiscal is becoming a headwind, if that is picking up, this is a really strong economy. the other question that really is important is the transient question. it is looking like transient means to go through the middle of next year on high inflation. that is putting some -- in the marketplace. we are concerned about pricing. >> normalization. we have heard that word this week. i picked up on it, and i have the following question. what is normal? what does normalization mean? >> that is a great question. when i think about it, it is

looking where the fed is giving us their long-run expectation of two and a half percent. that is what i am working off of. that is their view of what is normal. it is hard to know, because i have so much conflicting data coming through. there are bottlenecks that create all kinds of pricing pressures. we have issues with labor. i think the fed does not have a good lead on what is normal inflation. once we get through all of the labor shortages, going back to this idea of a long run, i think what is going to happen is -- i will go back to the earlier comment -- it is going to taper. it will take a. of time. up to a year and maybe more. get with the data is doing, and then they can make a decision on where we go with policy. what i think it is interesting about this that the fed is going through is that it is not a normal. of time where we start to see inflationary pressure come in and taper down. we are starting with the fed, and they are looking at a low

unemployment rate and a very high inflation rate. they're struggling with what is real and what is transient. again, i am taking a longer term view of what the fed is looking at, and i think, the way they are moving them a little more latitude with where inflation is going and with possibility. off the back of this discussion, bending the curve has a lot of attention to this morning. i want to talk about that this afternoon. the five-year segment of the treasury yield curve has gone from the -- inflation is looking at 230. 220. do you think they are underestimating the under -- inflation that is going on.

with the past telecom? >> i think they are underestimating the long run of potential inflation to be their expectations. if you are a policymaker, you do not want to admit that this is going to be for years to come. they indicate that they are going to come in the past, on the low side. we will see someone hired -- higher and more stubborn. we will get a dip on the others of things early next year, but then, we think it will be a little higher, and we think the demand side will still get some help from the fiscal stimulus, the child tax credit, low income households, high -- higher rages for lower income workers, and they will help the demand-side. we think the global economy will continue to pick up as well. global pmi's are usually as good

as long-running indicators of where yields are heading. i do think that they are underestimating things, and the curve will be volatile for a while. the fed may lag behind in the market a try to get ahead of one bad number, and we could see the curve shift again, but our overall picture is for the time being closer to the actual rate hikes that will start to flatten out. probably sometime next spring. this is a quote from earlier today that i want to touch on. conditions for liftoff are going to kick back in after next year. after liftoff, we will need a policy for some time. this is a debate that is important for the segment of the yield curve. how much potential tightening could there be? >> what i think is going to happen is that there will be --

it will continue to rise. the most relevant ones, in terms of what happens, is the 10 year stock. inflation numbers are higher than they are comfortable with through the end of next year, and the economy is holding up very well. they are done with the taper by media. it will be difficult to make the case for not raising rates a couple, few times in the next half of next year. the front end of the curve is the part is the most at risk. the back end of the curve has taken the prospect of the fed tapering and raising short rates very well. that is likely to be the case. as long as the market continues this perception which has helped so far that these numbers at the fed have in their dot plot on the out years, in the 2% area, so on. they are specious and that was

proved in the last cycle. you are not seeing to handled rates in the future. that will cause the curve to be bearish on the front end and not a problem on the back. >> you can see 2%? >> yes. like i said, i am going to speak to portfolio position changes and verbally a position, but the normal is the one -- 130, 140 level. we have the prospect of the peak environment in the first quarter , and then things kind of backed off. as people become impressed with the growth, there is a resumption of high inflation numbers, and there was a second between peak and the second half of the year. it the end of the year, i think this will hike a couple of times, and by the time we get to that point, at the end of next year, we will find out that it was transient, and those forwards were continue to come

down, and those long-term interest rates will have value in the 140 or 2% area. >> we have talked about the one 30's this week, regard of what you've said. >> thank you for sticking with us. lingering ever grand issues are weighing on corporate debt sales. it is china, china, china. new york, this is bloomberg.

>> this is bloomberg real yield, and it is time for the auction block. sales are fluctuating with voluntarily. news is falling short of estimates. we had two active sessions

throughout this week. it was a different story in the bull market, registering its biggest market since august. chinese firms were rushing back into the credit markets with dollar bonds to close out. china has been the big story for much of the week, and ever grand is taking everyone's attention at the start of the week. the china-based asset management had to say about china's growth model. take a listen. >> if we accepted this growth, foreign investors and commodity firms would grow, but china is slowing its growth to improve its growth. it is building up debt and capital. suddenly a has nonproductive uses. it is extremely important for china, and that his wife are doing it right now. the true riskier -- risk here has not gotten a memo to investors. i want to come to you on this, lisa. it is important to have a

conversation and talk about the shift in growth model in china, and what it means. what is mean for you, and how do you read this right now? >> the situation we find ourselves in in this company should not be a surprise to anyone. let me start first by talking about any tarp -- corporate bond a look at. this is a company that was problematic for a. of time. it was running an excessive abound of leverage. it essentially warned this government that they have too much leverage. this was not -- this was going to be a problem at some point. china is now going for a process of trying to take accepted leverage out of the market. the plan that they have, with houses for the living, this to me is just a situation wayne to

come to ahead. that is what we have. i know a lot of people have been talking about the implications for china, for broader growth. if we take a step back and think about this country, yes, the eyes -- the number are quite high watering. we look at the amount of liability going to bondholders, it is actually quite small, by comparison. much of the liability is actually falling with suppliers and with people that have contracted to buy homes. the government especially is indicating that they are going to protect these people. they are going to see homes come to fruition. we also believe that they are going to protect suppliers, so when i start to think about how this all ends up with growth, i think it is well flagged. the government will do its best to try to make this not be something that is going to be problematic for growth. they have the pboc adding liquidity, and i think that is something that has captured our attention. the impact on the banking system

in china seems to be relatively small and widespread, and i do think there is revenue implication that could have. jonathan: do you share that confidence? >> i am not that concerned about ever grand, per se. corporations have been rising over the last year show, and high yield spreads of the widening, so that is a bit of a concern, and that does reflect china shift in its growth model, away from the highly leveraged, speculative type of growth to, they are trying to achieve something that is more socially acceptable and more sustainable in growth rate. that isn't just due to leverage. when it comes to the market, the dollar bonds from ever grand really comprise a small amount of it. i think the question is, how well does china pull off the transition in his growth model?

china has been a big driver of global growth for a long time, and if we are shipping to a more mature model, what does that mean in terms of global growth? we are pretty optimistic about the next year or two, from a longer-term perspective, and that can make a big perspective -- difference in how we look at growth long-term. jonathan: the long-term look is to build on what they have already said. the result idiosyncratic name that is the big story, or is this a symptom about broader issue we need to pay attention to? what is it to you, rob? >> i think it is on the macro side that china's growth has slowed down. they need to work on inequality and, as has been recognized by policymakers in the united states, it was particularly noted when it was taken over the fed, a potential market crash.

people in the bottom half of society recover more slowly. rather than wait for their role to come and and run to pop up with their 1990 jump on market debacle to happen, they have put the pressure on from a macro prudential standpoint on these companies to beat certain criteria in terms of capitalization, limiting their debt and so on. we had enron and worldcom and lehmans. they are trying to stitch in time saves nine philosophy. they are trying to get the growth better distributed over time, and will only do that is to control credit risk, and their credit market has been

burgeoning with a very known credit spread. they are trying to introduce discipline where it is not naturally spiraling on its own. jonathan: i want to explore this issue with a little more detail. i was thinking about trades that might be vulnerable to a downshifting in china. then i saw your notes. you mentioned europe and you come at it from a very different angle. can you walk me through what you are concerned about in the credit market mark >> --? >> share. european companies are enjoying and -- a. of time where they are enjoying robust growth. it is the highest aggregate level in 15 years. it looks good, but underneath this model, margins are becoming a little bit fresher. a lot of people have been talking about that in the context of the united states. any of these problems are plaguing european companies. supply chain issues, supply labor issues, etc., but what it

has -- what has recently crossed -- cropped up is energy prices. the price of natural gas is going to be problematic in of variety of ways. first, it will diverge from recent analysis of chemical companies. the estimate is that, going into next year, it will have a higher energy price, and that will save two to 3%, in terms of price cost that they now are going to have by undertaking that margin, and erasing prices. when we look at the cost of the consumer, shifting focus away from consumer policies, governments may have to pick up the cost of this. it is something that we need to be aware of. this could all go away, but if it doesn't, it is one more thing to take into account when we are signed look at the resiliency of margins going forward. jonathan: a really important part -- point.

still ahead, the final spread. secretary yellen on capitol hill. that is next. this is bloomberg.

jonathan: live from new york city, i am jonathan ferro. this is bloomberg real yield. coming up, another dizzy fed slate, with things kicking off on monday. chairman powell will be in front of congress on monday and tuesday. the ecb forum is on wednesday. and numbers will close the week on friday. lisa coleman, i want to come to you on this. do you think we will see pressure on the market? in the credit market? >> we are still relatively bullish on credit.

we are at highest right now. there's plenty of room to be supportive of corporate credit. it is a matter of being more cautious and looking at sectors where we could see a low bit more pressure. one that comes to buying -- mind is food space. another thing is reeling to rise with higher exposure. jonathan: call ms. the trade. -- calm is the trade. this is a rapidfire round. when do we see the first hike? 2022, 20 23, or 2024? >> 22. >> 23. 22. jonathan: what do we see first on tens? 1% or 2%. what do we see first -- 1%, or 2%?

>> 2%. >> 2%. >> 1%. your third and final question. new hikes first. remember the rates in 2014 between the fed and the bank of england, and the bank of england faded away. new hikes first? >> bank of inman. >> the fed. >> bank of england. jonathan: thank you, and enjoy the weekend. thank you for your time this afternoon. and thank you to the audience. thank you for watching real yield. this is bloomberg tv.

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mark: president biden says most americans with the pfizer vaccine will be able to get a

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