Foreign competition for treasuries. When you add in the 700 billion next year, we think that the recipe for a steeper curve. Is it likely the curve ends steeper than it is currently . Highly unlikely unless the fed puts the rate hikes on ice or starts to ease. Very unlikely scenario. Very much likely contining to flatten. In that environment we paint strong growth. Inflation maybe ticks up a little bit. The yield curve continues to flatten. Critically, it does not invert. Im worried about it, too. I think we need to watch it. The 10year treasury, high 230s is meaningful. The history of inversions is such that it is tending to be a reliable forward indicator of recession. Whatever you think about the way the world is supposed to work, it does not work that way in the last two weeks of the year. Yes, yields have been going up. I think its a function of very Strong Equity markets. If they were to correct, they would go back down. I want to see them stay there after the first of the year. Jonathan joining me in new york city is greg peters, george goncalves, plus matt toms. Thank you very much for giving us your time. I know you were trying to run off and get away for the holidays. Lets begin with the statement we have seen throughout the week. Monday, tuesday, wednesday was looking aggressive. Just some yearend windowdressing . Or fundamental . The market realized that the president passed the tax bill in to law. Now we will have more supply. They had this prevailing fundamental view, but now we will have more supply and the fed is still unwinding the balance sheet. Greg i think it is a little overdone. This is a recalibrating. I think that the thesis holds. The flattener holds going into 2018 jonathan i cant figure many people think it will go the other way. Greg i see the consensus flipping around depending on how the curve moves. Jonathan you think price sets narrative . Greg people are worried about supply. You are having potential a lot of bonds hit the market and that could change the price. Jonathan matt . Matt ultimately the dollar weakness has allowed this flatness. Its important the 10 decline in the dollar has allowed the fed to push expectations of two to 2. 25. That flattened the curve. Growth could push the backend next year. That would be the change. Jonathan just to bring the dollar dynamics into the next year, i was looking at the forecast for g10 and could not believe how you did the forecasted price action is for eurodollar. Cable. A lot of people think it will be a nothing year for g10. Do you share that view . Matt it was a nothing year for 2017. Vol is dead, long live voll. It is unlikely to be that muted. You have Central Banks in diametrically opposed positions. The ecb and japan are heading in the opposite direction. Something is likely to break. We dont think those forecasts will hold we would be biased towards a stronger dollar. Jonathan lets talk about was going to break. So far this spread between , treasuries and bunds is getting wider and wider. Pushing toare at 250 260 on the front end just the other week. Where are we going here . Greg both are critical. The front end of the bund curve is way too low. End i short the front think it works in 2018 finally. At the same time in the u. S. I dont think enough is priced in. Both have to move almost in concert. That said, i think it continues to widen. Jonathan looking across the negative. , you have ill be going to address towards the depot rate at the ecb or start thinking about rate hikes . What will happen to the front end of bunds . Greg you slowly moved towards the depot rate. At some point you will see a move towards the depot rate, not anytime soon, put you need to see the normalization. That will take time. George the global rates have been supporting all fixed income markets. It is critical to see what happens in europe. People complain about bond bubbles, that was artificially engineered by the ecb in europes case. You have got to see your rates european rates release and american rights go even higher. Jonathan i feel like are so many year we sat here and said, this does not make sense. Yields dont make sense. Look at the data, the unemployment, growth. I cant see why you have 70 on a oneyear german bund. 40 basis points on a 10year. Could we say that for a few more years . Why not . Greg its important to decompose the front end and the backend. The bund market is driven by the ecb. The backend in europe and the u. S. Is driven by inflation dynamics and growth dynamics. The truth of the matter is those are not necessarily overly robust. You layer on top of it a tremendous need for duration and yield. There is a starving yield market. You really need to see something meaningfully change. Jonathan you had a great year and only fading that inflation talk on the short end. You think that will be the story next year . Greg i do. The same story but with more volatility. I think the issuance in the market is going to drive more vol, but i think the general trend is still in place. The demographic trend is really tough to shake. Therein lies the fundamental issue that the economy faces. Jonathan matt, inflation risk. Option this week. Some people referring to that is just a call option on inflation next year. Is it a hedge or something a little bit more more people having more conviction about what may happen with the reflation story going into 2018 . Matt we think its a good time to buy a call option. You have countervailing forces. The print has shown core pce 1. 5 is still muted. We think there are two dynamics. There is an unwind of a global disinflationary trade that is slowly going to stop the present inflationary levels. The demographic trends will continue to have that build. It will not skyrocket, but as the global suppression unwinds we think you will see a build in inflationary pressure. It is not a bad time to look for the call option to the upside. That could bring volatility next year that is not forecasted currently. Jonathan is now the time to buy the call option on inflation . Greg 2018 will see if the phillips curve is dead or not. It is not a terrible call option to have, but the inflation pressures are not as pronounced as some people believe. George we think the phillips curve is very flat. The further we get the Unemployment Rate down, you will see that cake into wages. The Structural Forces are going to be there and keep inflation in check. You can still have a cyclical move. At least at some point in 2018 inflation will move higher. Having the call option makes a lot of sense. Jonathan could unemployment test below threes . George we think there will be a move towards 3. 5 . We will see how all the fiscal stimulus gets through and have how quickly it results in more jobs. The scope of the economy continues to grow. Jonathan gents are sticking with me. Coming up, the auction block. The u. S. Tax bill causes a uturn in the market. That is coming up next. This is bloomberg real yield. Eal yield. Jonathan from new york, this is bloomberg real yield. Im jonathan ferro. It is time to head to the auction block. It was a record year for global investmentgrade issuance. It topped 2. 2 trillion with 8300 debt sales. Banks forecasting lower issuance next year. Limits on repatriation could affect borrowing. Meanwhile, the sector sold a record 55. 6 billion in december, breaking a record that stood for 32 years. In 2018, the u. S. Is about the sell the most the debt in eight years. To discuss supply and the demand for it, greg peters, george goncalves. Matt toms. Greg, lets talk about credit and treasuries. Start by having a discussion about credit and the supply we could see. Weve had record years after record year. Next year, is it going to be different with the tax plan . Greg each and every year it is forecasted for oversupply and it never happens. We are breaking record after record. Many people have the same type of levels, but it will be quite elevated. Corporate america is still very much focused on debt and that is not going to change. Anytime Jonathan Matt . Matt completely agreed. There is a trend towards funding in the dollar market in the european market. If there is a vulnerability it is an increasing reliance on dollar funding in euro. We dont see a force that has a unwind in 2018. Jonathan the amount of supply we have seen this year and draw the station between the issuance that is come through for refinancing and the issuance just a push up the debt . George if there is any year with your reduction, next year is the year. We have always been hard to call these tops. There is a taxable implications. There has been some pulling for financing. The fed has been the most televised fed in history. Jonathan they finally did with what they told us they would do. George it was well televised and corporate borrowers took advantage for the last 18 to 24 months. We did see a little bit of a pullback. Investmentgrade issuance will continue. Jonathan there was some worrying turn in growth issuance . It is just refinancing . Matt it is. It is a little bit of growth. Growth is higher but that is also higher as well. They are refinancing, but also adding to this stockpile of debt. Jonathan lets talk about the demand side. Will there be the appetite in the same way there was this year . I looked at highyield and i can compare highyield to other risk assets so far this year. Take the s p 500, em, compare to the performance of junk debt. Junk debt has done nothing all year. Why . Greg supply dynamics are differenteld is very than investmentgrade. The buyer base is different as well. What helped the investmentgrade Corporate Bond market has been the foreign participation. Foreign investors have been forced out into the u. S. Market. They either by duration or credit, but they dont get on a high yield. Highyield is more of a captive audience. As a consequence it has not performed the same way. You had some idiosyncratic issues pop up like toys r us and others. I think it has kept the markets on edge. Jonathan walk me through what we have not had a performance against the backdrop a Strong Performance in risk assets. Why highyield has completely lagged. Matt its important to note it lagged within a very low volatility range. 5. 5 to 6 yield range over the year. You have clipped a decent coupon. It is the bubbling up of demand for other Asset Classes that has propelled them as far or further than they should have gone. It is hard to look at highyield as a failure. It is more looking at global flows that push other things further, including ig which is near 94 basis points in a low range this year, and equities. Its important to note its not a specific weakness. The internals are quite strong. Jonathan is 2018 the year for coupon clipping, or do you get capital returns as well . Matt it is harder to forecast a lot of capital returns and the fixed income market. It is a year for coupon clipping and looking to avoid downside risks. We believe you are meant to sell the rallies, not by the dips and avoid downside risk. George totally agree. Returns will be about half of this year in fixed income. Much wider distribution. What punctuated this year was such a narrow distribution of outcomes that the base case was easy. Now you have a base case but you have upside and downside around that. Its a much more treacherous year in 2018 than it has been this year. Jonathan you agree . George i think so. Differentiation steps and as the fed keeps raising rates. We think ig benefited. That will go away. Each time funding costs go higher. Jonathan why would the flow stories not be beneficial next year . Why is that flow story still not going to be positive in the United States . George literally your costs of getting into these trades are more expensive. When rates were at zero, both japanese and european investors were agnostic. They would stay local or global. Now they will probably say stay local. Greg across currency basis is the real equalizer. They cant meet deferral rate. I dont think youll see the same kind of flow, and i dont think you will see the same kind of talent. Jonathan is that why you might see more u. S. Money going to europe when on an absolute basis it might look attractive, but once you compensate it looks like nothing else . Greg the problem is its a very volatile estimate. The cross currency basis, you dont buy a credit because of cross currency basis. You need to disconnect those two. Jonathan do you agree with that . George absolutely. Jonathan i want to give you a market check as we approach the close of the year not too far away. Another week. At 1. 89. Te a big story,. 15 on a 30year note. This story is curve steepening, not flattening. Still ahead, the final spread. The week ahead features a glimpse of potential political trouble in europe. This is bloomberg real yield. Jonathan i am jonathan ferro. This is bloomberg real yield. From new york city, it is time for final spread. Coming up, u. S. And european markets closed for christmas. A light week of events. U. S. Economic data, and the italian Prime Minister is expected to hold a News Conference marking the end of his administration and the start of the countdown to spring elections. Still with me george concalves, greg peters, and matt toms. I feel like we had spent the year worrying about european politics, and it has yielded very little for our efforts. Why should we be worried about politics now, if at all . Matt ultimately you need to look to the change of the ecb leadership at the end of 2018 and into 2019. The political framework in europe will guide how much leash the ecb gets. If you infuse volatility ahead of that, that could create some turbulence in markets. That is not being talked about today, but it will come center stage in the second half of 2018. Jonathan if you take the catalonian regional debt and look at the performance of the bond, if you faded the panic, there was a massive opportunity to buy the bottom in septemberoctober. That captures the whole story of the year in europe. Dont worry about the politics. Why is it going to change . Greg politics have been basically white noise this year. You have been paid to focus on the fundamentals. You have been paid to focus on what is happening on the fiscal side. I still think thats the trend. I think politics, unless you see something fundamentally shift and the rise of populism everyone was worried about this year has subsided. I still think you are better off focusing on fundamentals george after the French Election, it went flat in europe. Zero vol in european government bonds. That speaks to it. Jonathan i think for many people outside so the europe performance that it difficult after the French Election to find a way to capture the positive story in europe. Yields just wont go high. You cant get into equities. You cant squeeze much out of that at the back end of the year. One place you have is cocoas, bank debt. You can see the performance in 2017. We have absolutely ripped. Is there anything left to squeeze out of one of the big trades in europe this year . Greg i like european financials, but cocos, there is a misunderstanding of the call option. They really dont know what they are investing in. Jonathan what are you thinking . Greg youre better off more senior in capital structure because these things can get equitised. It is hard to price the option. Its nothing more than a data trade. That works when it works, but then there is an idiosyncratic issue and they get completely wiped out. Banco popular, you lost basically 90 in a day. That is a structural issue i think people underestimated. Jonathan matt, do you agree with that . Do you protect yourself a little bit . Matt i would agree with greg. This is not a time to be taking longtailed risk. The reward is just not there. That is true across the fixed income spectrum. It is time to upgrade a portfolio and not take longtailed risks. You are just not compensated. Jonathan is that the theme next year . Derisk a little bit . Greg its about taking chips off the table. Jonathan you just had massive tax cuts in the United States, and we are talking about derisking. Greg what are you getting from it . Massivegetting 2 and a deficit balloon. That is not a great riskreward from an investor standpoint. I think many investors believe it is ephemeral and a very big cost. I think youre getting paid to derisk. Risk premium is piked. Jonathan we will wrap things up and look at 2018. One word answers if you can. 10year u. S. Treasurys . Higher or lower by the end of 2018 . Greg lower. George higher. Matt higher. Jonathan twoyear bund treasury spread wider or narrower . Wider. Narrower. Jonathan you hold this until the end of next year. Tesla 2025, or the austrian century . Austrian century. George longduration, austrian century. Matt i will do the same. Austrian century. Jonathan some consensus on an austrian century bond. It has been great. Thank you george concalves, greg peters, and matt toms. That does it for us. I will see you next year. This is bloomberg real yield. Scarlet i am scarlet fu. This is bloomberg etf iq. Where we focus on the access, risks, and rewards offered by Exchange Traded funds. Scarlet the republicans longawaited tax cut has the dow jones etf taking in cash like it is november 2016. And bitcoin etf filings, we look at what regulators want to see. Bullish on china and the internet