We think it is quite solid. We got quite good news today. We think it is a overall positive backdrop for the economy that is about to also get more tailwind from the tax policy. It suggests the job market is continuing to heal and i would be surprised if the bond market did not take this into account. In the last 70 years, we have never seen the Unemployment Rate at 4 when the deficit spending is set to increase from 4 deficits to 5 , so this is an economy running hot right now. Wages are gradually continuing to pick up as the Unemployment Rate comes down. There is evidence we are closing in on full employment and this is the start of a more pronounced acceleration in wages. I think this volatility in these data, i think the rush to judgment on Hourly Earnings is a little too soon. It looks like it is probably pulled in from the folks in the top end. We are very excited to see the 2. 9 growth wage number. Wage growth number. It is what we have been talking about for the last year and it was really the impetus for our tax land, to create real sustainable wage growth. It is something that has been missing from the country for a long period of time. Jonathan joining me around the table in new york is lisa hornby, fixed Income Portfolio manager at schroders. Kevin giddis, head of fixed income at raymond james. Coming to us from boston, is eric stein, codirector of Global Income and portfolio manager, eaton vance management. Guys, it is great to have you with us on the program. Kevin, lets begin with you. Does it make sense for the treasury to be woken up to the world around us . Nothing for me has really fundamentally changed in the last couple of weeks. Existed foras months, you suddenly the treasury will cup. Why . Kevin we spent most of last year focused on inflation. As far as the bond market was concerned, so treasuries are going to go on a higher yield if we see inflation. That changed after tax reform and a number of new factors came into the market that would create this new wall of worry. The dollar decline. The dollar is stronger today, but the dollar decline is an issue. Trade disputes. China is the biggest buyer, and now the deficits. If you are not taxing and you are spending, you are going to build deficit. Those things have changed the dynamic of inflation and why yields have jumped of. Jonathan lets get that yield down. How much of the reap racing that we have seen so far has just been about Inflation Expectations . Lisa i think you have seen a big move of inflation break even that come of it is coming through there. We are starting to see real yields move higher now, because and we think that tells us that attention growth is may be, and tax reform is stimulative area the other part of it of course, is that Central Banks are buying 1 trillion less assets in 2018, than they did in 2017. Jonathan as you look at the situation now, do you view this repricing of treasuries as a market catching up to what has happened already or a market trying to get ahead of what is about to come this year . Eric i think it is both. I think right now, at least up until this their world report, and the fed this weeks, it is really a market catching up to the confluence of factors. You talk about synchronized Global Growth in 2017 and early 2018. Monetary policy, whether it is andfed raising rates shrinking its balance sheet, or the ecb buying bonds at a slower pace than it has in the past im a monetary perspective as well, fiscal policy, tax reform. All signs are pointing towards higher yields whether it be monetary, fiscal, growth or inflation. Jonathan is it trades on or trades off . We came into this year of a consensus view that we will get a flatter yield curve and some people said it was becoming a much more crowded trade. Im wondering whether we are taking some of that off or putting Something Else on . Which one is it, when you think about it this way . Lisa i think one of the surprises this year will be a steepening of the 210 curve, the market came in to a flatter curve. Typically when the fed is raising rates, the curve is flattening. I would say that out of the last six rate hiking cycle that we have seen, the curve has flattened in five of them. The curve actually steepened as budget deficits were rising, so we have a similar phenomenon today even with the increases in the front end issuance over the next two months. Next year, there are still looking at funding another 300 billion of treasury debt. That needs to come from somewhere. There is a possibility they will , why wouldntam they . Given how flat their yield curve has gotten . Jonathan is this 1986 . Kevin i dont know if it is 1986, but we have seen the curve steepen 68 basis points. The steepest it has been since midnovember of last year. So when you put it like that, not 200 basis points, but it is not 40 either. So there is some parallels to that. I am trying not to fall into the same trap that others have at the beginning of every year for the last five years, where we get good, strong growth and a surge in treasury prices and we get hopeful inflation that drives Interest Rates higher, only to have it peak in turn down before the end of the year. Kevin i do like them at 280. We will find out who else likes them next week. Lisa i think treasuries offer better value than a few weeks back. Obviously, the bigger distortion is probably in european sovereign yields. In germany fiveyear yields are , still on 10 basis points, in the context of nominal growth in germany of over 4 . Three rate hikes priced in for the next three years in europe. I think that seems a bit modest, given the data. Jonathan lets talk about that, not just europe but japan as the boj out today offering to , buy an unlimited amount of bonds for the First Time Since july. They are not capping yields at 3 . These guys are not capping yields at 50 basis points, and the boj is capping yields at 0. 1 . This is craziness, is it not . Lisa you said it. You cannot say it better than that. Jonathan it feels like the japanese are trying to nationalize the bond market. When you think about it that way, the path of least resistance of the yields is indeed higher, but how much higher if the bank of japan is going to keep a lid on every thing that happens there . Lisa that is a fair point but one of the biggest distortions resulting because of bank of japan purchases because of the ecb, is actually in credit markets, rather than in treasuries. I think we have seen tremendous amounts of overseas buying, 45 of the u. S. Corporate market today is overseas versus 25 10 years ago. So we have seen the distortions actually coming through risk assets. I think more so, now at this point, then through rates markets. Jonathan kevin . Kevin i think it is a great point that she is making. It has been the best trade in the sovereign marketplace for a while now, buying treasuries. Will the trade still be good now that italy is starting to see Inflationary Pressure . Some of these other European Countries seeing Inflationary Pressures that is something we will watch closely. But without a doubt, it has been pretty strong on the board. Will that trade still be good now that italy is starting to see some Inflationary Pressures . U. S. . That is something we will watch closely but it has been the best strategy on the board. Jonathan eric, what are your thoughts . Eric we talked about the boj before and they are capping the 10 year at 10 basis points. One of our favorite trades is shorting the 30 year part of the jgb curve, basically where they dont control in a free market part of the japanese bond market curve. Jonathan eric, is that not the widow maker again or is it , different this time around . Eric i do think it is somewhat different because as you said before, the yield control policy is suppressing yields throughout the curve up to 10 years effectively. But that part is more freely floating. In addition, the economy in japan is growing. There is real good Corporate Governance reform stories going on. There is not a lot of inflation, but a little inflation. So i think that given the pressure on global yields and the strength of the japanese economy, i think being short of jgb30 year part of the curve is a good place to be. Jonathan you had to be short somewhere, would it be jgb or bunds . Kevin it would be bunds. One of the greatest monetary failures seems to be japan not b curve is a good place to be. Jonathan you had to be short raising its inflationary rate. And continues to be a 30 year or 40 year issue a writ i do think that we are about to see higher rates in germany in particular. Johnny been be sticking with us. Lisa sticking with us alongside kevin and eric. It has been a rough week for risk assets. Coming up on this program, we take you to the auction block. Elon musks first orderly sale. That conversation is next. We continue to cover the selloff. This is bloomberg real yield. Jonathan this is bloomberg real yield. I am jonathan ferro. I want to take you to the auction block. The u. S. Treasury boosting its borrowing for the First Time Since 2009 in order to cover the mounting budget deficit. Longterm debt sales will increase to 66 billion this this quarter. This comes against a budget shortfall that grew to more than 665 billion last fiscal year. Meanwhile, u. S. Investment grade issuers have sold more than 220 this quarter. 120 billion in january, a drop of 33 from 2017, and marking the lowest total in that month in three years. Tesla sold nearly 550 million of auto lease back to bonds. The company was able to slash the risk premiums. The bonds are tired to leases of its model x vehicles. Still with me around the table lisa hornby, kevin giddis and , eric stein. Kevin, youve got to say we have this selloff in risk assets at the moment, a selloff in treasuries and a selloff in equities. I have to say, credit is starting to reprice. Were starting to see some cracks, but i would not call it credit stress, would you . Kevin not quite yet. Since the Fourth Quarter of last year, the treasury 10 year has gone up 80 points, spreads on Investment Grade corporates has widened maybe 40 basis points. Demand is still very, very strong. So what i am looking for is those stresses, especially in high yields. We are not seeing that yet. We also arent seeing corporate defaults, alltime lows, and until we see cracks like that, it is still an attractive trade. Jonathan lisa, if you look at hyg, you see some cracks starting to appear, but the chart right there, equities role have really rolled over. Are you surprised by the fact that comparatively so, the credit estate is resilient . Lisa it is hard to say that have really rolled over. Equity is really rolling over given the rally we have had over the last few months. [laughter] but yes, sure. With rates growing higher, high yields have more of a retailbased orientation. It is less sticky money than the institutional demand we are seeing in Investment Grade credit, so i am not surprised to see with institutional demand we are seeing in Investment Grade credit, so i am not surprised tf outflows, and the highyield etfs base. From the valuation perspective, we are through cycle types and about 35 basis points off of all time tights in the yield market, especially when everyone is optimistic on the equity market. Jonathan eric, do you expect the cracks we are starting to see in credit materialize into something much bigger . Eric right now, i would say no. I think everyone is focused on etf prices. Jerry and k, hyg the way that ,e think about it at eton vance we think about the spread of a highyield bond versus treasury. Spreads have been tight and have widened the last couple of days given the risk of selloff, but some of the decline you have been seeing on etfs, are the duration of highyield bonds selling off based on u. S. Treasuries. Still a good chance you earn your coupon and have risk if it is a risk off deflationary environment, or risk if it is a higher rate inflationary environment. Clearly right now, it is a higher rate repricing, which is leading to some stress in the market. I would put it as a bigger risk than a deflationary risk off, so i think there is a good chance you can earn your coupon but not as much value left in the credit markets as we had a year or so ago. Jonathan if you are at the federal reserve, you might be thinking about what happens in credit. If you are at the ecb, you would be more focused on peripheral spreads. What is more remarkable is the likes of italy and spain have not been part of a selloff in a material way. At all. Spreads are still tight. Does that make sense . Kevin its never made sense to me, but you get the protection of the European Union or the ecb. When you look at the economies of these countries, would you rather own a 10 year at 1. 45 or a u. S. Treasury at 2. 80 today . It goes up and down the line, it offers great protection, currency protection, market protection. At some point, that will crack. Jonathan lisa, your thoughts . Do you want to be short italy or spain . Lisa i definitely want to be short italy. We forget there is an election coming up soon. Before the French Election last year, french yields sold materially. As there were trends of headline risk, and i think the market is forgetting about that. I think italy has not participated in the selloff in rates over the last few weeks. This is a market to me that is materially mispriced. Jonathan mispriced by how much . The reason i ask this question also, is what is the time arising for this trade . Is this something that is going to have more sustainable upside . As the year progresses, yields higher and yields higher again . Lisa i cannot make a promise. I think it is a structural trade. If you look at the dependency ratios in italy and the demographic issues that italy is facing over the next several years, it is not a pretty story. I think it is more structural. But in the near term, we have to come to terms with the fact that the ecb has been buying the net debt in europe, seven times of that that. And there are now stepping away from the market. Jonathan eric, you talked about how you would be willing to short japan, but only at the long end. Would you be willing to short italy . Eric in our eaton vance global macro strategy, we have had short positions going back to 2005 and 2006 with greece and italy, more recently we had short italy positions. Not as optimistic, i am shorting italy right now because it seems to be a oneway trade every day where spreads continue to tighten almost every day. Short italy positions. I would agree with the previous guest, it does not make a lot of sense, but i think the tough part with the european peripheral bond markets seem to oscillate which makes more inherent sense for us. Right now there are trading more like a rates market area without duration volatility, spreads seem to find tetter every day. Fundamentallot of problems with italy, and there could be some volatility and around the election. It has been a tough trade to be short there given the never ending spread tightening. Jonathan eric touches on something important. After the eurozone debt crisis, peripheral europe started trading like credit. Are we going to see peripheral europe trade like credit or a rates market . One or the other . Lisa i think once the ecb exit it comes clear, it will start to trade more like a credit market and less i should say, maybe more like a rates market based on fundamentals and a credit asset right now. Jonathan either way, they will gun higher regardless . Lisa yes. Jonathan lisa sticking with me, alongside kevin and eric stein. Next on the program, who will walk you through the final spread. Here is a check at the markets. Next up on the program, we will walk you through the final spreads. But before we get there, here is a look at the markets. Yields higher through the week, what a move you have seen in the 10 year treasury. Up 17 basis points on the week so far. 16 on the 30 year. It is a steeper curve in the united states. Next up, the week ahead. Featuring a Rate Decision by the bank of england. That conversation and a preview of the week to come. This is bloomberg real yield. Jonathan i am jonathan ferro. This is bloomberg real yield. I want to head to the final spread. Coming up over the next week, we get a Rate Decision from the bank of england with boe governor mark carney delivering that. Also, ecb president mario draghi delivering his report to the european parliament, his annual report. We get another round of earnings including tesla, and once again, there is the potential for another u. S. Government shutdown, which most investors have become desensitized to at this point. With me now is lisa, kevin and eric. Lisa, we were talking about Central Bank Decisions before the break and what this means for peripheral europe and the ecb. One thing that people have not started thinking about in a big way yet and rightly so because it is a 2019 story, is who runs the ecb next . Im surprised by how governor kuroda is to the bank of japan. The next person that takes over from ecb president mario draghi will have some big shoes to fill. When do you start thinking about the ecb postdraghi . Lisa i told you i am short btps. Jonathan so youre hoping it is a german who takes the top spot . Lisa i think that may be the case. It is a selloff environment for european bond yields that have been anchored by the ecb program, by low rates, etc. I think it brings up a interesting point, which is the fomc been anchored by the ecb program, by low rates, etc. , tht members as well. It is a different cast of characters, so we are looking forward and we are trying to make expectations based on what they are telling us. It is a whole different fed this year and it could be a whole different ecb next year. Jonathan kevin, lets think about it. You are at the bloomberg terminal one morning and the drops across and it does, that is the next president. Do you react to that, should you respond to that . Kevin not immediately but i am thinking that there may be a shift in focus. Much like it has been a prousa or proamerica focus since donald trump was elected, that maybe there is a progerman focus within the ecb or within the European Union. That could be to the detriment of some other countries. Jonathan c