Last time i checked they are still doing so. I think what has caused people to stop and take note is the speed and the vehemence with which it has flattened recently. You still have lots of Central Bank Liquidity around the world, even if the u. S. Is pulling back. The bank of japan expanding their program. Ecb is very involved. You are not seeing Global Central Bank purchasing winding down. You can easily say that between 50 and 0 is the flashing sign. Things are starting to get a lot more challenging. Above 50, you can always kind of explain it away. If equities are doing well, credit spreads are doing well, the economy in general in the u. S. And globally is doing well, i think there will be some willingness to look past the flatness of the curve. Jonathan joining me in new york city to discuss is Bloomberg News and bloomberg radios Lisa Abramowicz. Coming to us from atlanta is rob waldner, chief strategist and head of multisector at investco fixed income. And joining us, alan higgins from london, of coutts and co. I want to begin with lisa. Go to the chart we have been talking about for what i feel like is some weeks on weeks. Twos versus tens. Pick your place on the curve. South of 60 basis points. How much signal is in that . Lisa a lot of people will say this time is different. This does not indicate a slowing of the economy but rather a fed that is hiking, as Cameron Crise wassaying, this is typical. That said, as ira jersey of Bloomberg Intelligence noted, this is pricing in a policy error. Right now this is saying the longterm economy is not accelerating. End of story. Period. The more the fed hikes, the more it will slow that down and the more you will see that flattening continue. That is not a bullish sign for the economy longterm. Jonathan rob waldner, do you agree with that statement . Is that what you see in 58 basis points on twos and tens or Something Different . Rob we see a different situation when it comes to the yield curve. The front end of the yield curve is being driven by growth, and growth is superstrong. The new york fed nowcast shows growth for the Fourth Quarter likely around 3. 8 . The long end of the curve is being driven by inflation. Inflation is mia. There is no inflation in the economy right now. That is keeping the long end contained and the short end is rising. Lisa my issue is, people can conflate inflation and growth. At what point are they synonymous . There is a question of, can we have this sustained Growth Without some kind of inflation . I dont know what the answer is but it seems like something is amiss. Jonathan there are two contentious points in the bond market at the moment. One is the flattening yield curve and the other has got a tremendous amount of attention for a long time now, bunds, treasuries, twoyear, and this aggressive widening we have seen throughout the year so far. We are north of 240 basis points on a two year spread, lisa. I have been asking if there is any oxygen left up here. I wonder if the fed can continue going it alone. Lisa here is the weird thing. When you have the u. S. Tightening or one Central Bank Tightening while another one does not, you will have people go into the dollar, into the currency of the bank that is tightening. You are not seeing that here. So if that is not happening, you will not have a stronger dollar as a headwind so the fed can keep hiking. It will not necessarily debalance the economy, even if eurozone keeps up with its low rate policies. Jonathan i want to turn to alan higgins of coutts in london. It is always great to catch up with you. It has been far too long for you and i. We have been talking about the front end of the yield curve, bunds twoyear versus u. S. Treasury twoyear, and this aggressive winding we have seen throughout the year, north of 240 basis points. My question is whether the Federal Reserve can continue going it alone from here and whether that spread can continue to get wider . Alan nice to talk to you. We think it will continue to go wider. For fixed income investors who do not want to take a currency risk, they cant catch all that spread. If you hedge it out with threemonth money, threemonth fx forwards, you will pay circa 150, 160, so you dont capture all that spread anyway. From a fixed income perspective, it is less wide than it may seem. The fed are tightening and the ecb is on hold doing nothing until the third quarter. Jonathan if you think about it in 2017, everything has kind of gone right you would hope to go right in europe. The equity market has not done much but the earnings have come through solid. The data is looking really good. The ecb has remained on hold. The economy overall has picked up. Confidence numbers are great yet yields have gone nowhere. It is the same in the united states. Why are we here with bunds south of 40 basis points on the 10year and treasuries around 2. 35 with the data where it is right now . Alan you are quite right. If you came down from mars and looked at this European Data in particular, you might think maybe short rates at 3 or something. They are not because although European Growth is very strong right now, there is much more slack in the economy. High unemployment rates in europe compared to the united states. Put simply, it is the magnetism of where cash rates are. With cash rates in euros negative, that is pulling down the whole curve. So that is here to stay. The u. S. Is a more interesting question. Why is the u. S. Tens and 30s so resilient . Having traded fixed incomes virtually all my career, one thing i learned quickly, one of the hardest things to get right is the 10year treasury. Just when you think you have it right, the full narrative is discounted. We wonder whether the 10year treasury knows the fed will get to two or two and a quarter and will be done, and therefore we dont see much higher 10s or 30s. We are not saying it is a fabulous investment. Obviously the income stream is low, at the 10year and the 30year knows, that would be what we say. Jonathan lisa . Lisa i love the idea of martians coming down and looking at European Economic data. Jonathan they would be very confused. Lisa they would be confused on many fronts. Europe is dealing with what the u. S. Was dealing with not so long ago, the goldilocks scenario. The idea that growth is accelerating but still not great and you are not seeing that much wage pressure. It is the same kind of story. People are still piling in and the ecb is continuing with quantitative easing. Jonathan rob waldner, typically with rates and yields as low as they are, you have a decision to make. You either add duration, go along the curve, or you go further along the risk curve which means owering quality. In europe, that will be difficult to do because highyield already trades so tight. If you wanted exposure to this positive story in europe on a fixed income side, how are you going to express yourself . Rob it is undoubtedly true that european credit is much tighter. European high yield yields about 3. 4 right now. That being said, the ecb is still doing qe. The growth is still good in europe and good in the u. S. We think that should be supportive for credit overall. One thing we are concerned about is if we got u. S. Yield curve to a flat, to be completely flat, that is typically in past environments the way you would get some sort of disruption in markets. Fed funds to the 10year, we are about 120 basis points in the u. S. That is a level where we still have quite a ways to go before we get to a truly flat curve. In our mind, that means a big disruption in credit is unlikely in the near term, but certainly you start off by saying yields are tight and they certainly are. Yields are low. Jonathan alan, how would you express that positive view of europe . What is the most best, most effective way of expressing that in europe at the moment in fixed income . Alan you have to be selective. Within peripheral debt, portugal has come a long way. We are talking about portugal, spain, italy. Portugal is likely to get the full Investment Grade rating very soon. The fundamentals look strong. The 10year yield a little under 2 . Not high but it is a government bond. There is even some interesting portugal bonds in dollars. Staying with euro land, it is different from the u. S. Highyield. It is a much higher rated market. It is a double b market. There is a natural difference. We are investing cocoas. Subordinated financial credit. It has also performed well, but there is still a premium. Then, just very selective. Over here we have an interesting hybrid market. For example, one of the issues we have in the portfolio we disclosed would be volkswagen 10year subordinated debt. That yields circa 3 , not super highyield, but in the context of where bunds are and where cash is, selective value. Jonathan alan, quickly, cocoas have had a great year already. Would you continue to buy cocoas from here . What are you looking in them, the yield you get on them . Are you looking for more capital returns on the back of them . Where is the upside . What you looking for to get from that specific trade . Alan it is more income, a tremendous rally. Short dated cocoas are falling to very low yields. Essentially, you are still compensated. The yield is still in excess of high yield, and in excess of subordinated Corporate Bonds we have over here, the newer market in europe, the socalled hybrid bonds. We carefully chart the spread of cocoas versus highyield versus hybrids, and there is still some value in cocoas. You need to stick with National Champion banks. Otherwise, you can get caught out. But if you like, you are being compensated for the memory of 2008, 2009 and 2011, 2012 in our view, in National Champion banks. There is still some compensation there. Jonathan interesting stuff. Lisa abramowicz, rob waldner from investco and alan higgins from coutts will be sticking with us. Coming up on the program, the Auction Block. Mooney bond sales race against the u. S. Congress. That story is coming up next. This is bloomberg real yield. Jonathan from new york city, i am Jonathan Ferro. This is bloomberg real yield. I would like to head to the Auction Block now, where state and u. S. Local governments are rushing to borrow before Congress Enacts tax legislation. The amount of sales scheduled for mooney bonds have swelled to more than 22 billion, the most since october 2016. That is promising to weigh out prices for the remainder of the year. Elsewhere, over in africa, nigeria raised 3 billion in a twopart International Bond sale. It was its biggest bond issuance ever. The nation split the offering equally between 10 and 30 year traunches with the issuer receiving 11 billion worth of bids. Credit jitters seem to be very much gone, for the time being. Companies sold billions of new bonds this week. Nordea bank may well have set the lowest Interest Rate ever on the riskiest bank debt. Contingent convertibles, cocoas as they are known, investors wanted seven times as much as was offered. That was a discussion we had previously. Still with us, Lisa Abramowicz of bloomberg, rob waldner of investco fixed income, and alan higgins of coutts. Another big story throughout this week has been china and its aggressive spread widening we have seen through the week. Top rated fiveyear chinese Corporate Bond yields, that premium is the highest since june of the sovereigns. Lisa, you have kept your eye on it. How significant is this blowing out of this spread at the moment . Lisa a lot of people think it is quite healthy and it means that the government is going to allow companies to face some serious funding pressures and for some to default. In fact, earlier this week, we got some Corporate Bond defaults in china. Should that happen, that will allow a healthier market. That is the way it is being painted. The flipside is, the default and the finance costs become onerous and there is a wave of defaults and it becomes disorderly. There is a very narrow space in between those two scenarios, of which there are two completely different outcomes. Jonathan the situation in china as a leveraging campaign continues. What strikes me is how isolated this appears to be. It has not bled through to developed markets in any way, shape, or form, or to e. M. Either. Are you surprised . Rob no, we are not surprised by that. Chinese capital controls have been very effective since they put them in place the beginning of last year. So what we saw at the end of 2015 and 2016 was large amounts of capital outflows out of china that had an impact of connecting the Capital Markets between the u. S. With the Global Markets and china. Now those capital controls are quite tight, so in our view, there is not much leakage, which is insulating the chinese market. Jonathan i was looking at catalonia bonds earlier today. The reason i bring this up, as we look at china, is that throughout 2017 you have been paid really well to take risk when it shows up. This is catalonia as that crisis, the political crisis really took off with yields north of 3 . Now we are south of 2 . Your experience so far this year, has that been the lesson so far . When you see risk, take the other side of the trade, even if you have to look silly for a bit . Alan that is good advice. Generally, we have that as part of our philosophy. Admittedly, we did not catch catalonia unfortunately, but we tend to buy into geopolitical risk. We still got some russian dollar bonds in our portfolio we bought in 2015. They turned out to be spectacularly good investments. With respect to china, this is healthy. The authorities know the number one problem is the buildup in debt to gdp, and it is mainly in the corporate sector and they are doing something about it. They were successful with intervention on the currency. Everyone thought it was going to collapse this year and it did not. We suspect the market should give them a bit more credit. By the way, until recently, the spread widening was correlated with moves in u. S. Highyield and investmentgrade. Maybe this will snap back next week. Lets have a look. Jonathan something some people would push back on is to say they were bailed out to some extent by a much weaker dollar this year. This really happened to stabilize the currency. The experience we have had so far is that they pushed through the deleveraging campaign, is that every time there is a little bit of pain they back off again. Why is this time different, alan . Alan that is a fair point. I would say, the chinese yuan is so idiosyncratic, it is more than the fact that the u. S. Dollar has really weakened off in the latter half of the year, and the chinese yuan has been strong all year. So i think it is not just the dollar story alone. It has helped. Yet, you are right. If they see signs of distress, they back away, but debt to gdp has finally fallen for the First Time Since i have seen it in china. The first tentative signs they are moving in the right direction. Jonathan rob, i want to turn to you and get your thoughts on em more generally. With this happening in china you said it was wellcontained. Do you see anything that would push you to take additional risk in em with this in the background . Rob there are a couple of factors. One is good growth in the core markets of the u. S. And europe, is good for em. China has committed to this one belt, one road program which is a massive investment across a number of different em countries which is positive. All those are positives for em, tailwinds for em if you like. We would look for em to do relatively well. To come to your geopolitical risk question, we think what is driving markets is growth and inflation and financial conditions. If the geopolitical risks do not impact one of those three, they are to be bought on the selloff. I think that is what you saw in catalonia. In the end, it did not affect growth or inflation or financial conditions so you buy. The same is true in a number of geopoliticalcorrections we have seen this year. Jonathan final word, lisa . Lisa i think emerging markets have been a sweet spot. It remains to be seen whether they will be as immune to some kind of pullback in developed markets or slow down as they have been. Putting people are discounting the potential risk. Not to say it is not a good investment, but this has been a sweet spot to the point of perhaps ignoring some sort of fundamental issues. Jonathan bloombergs Lisa Abramowicz with a subtle dig, maybe. Lisa no, not a dig. It has been an amazing run. It is a consensus trade and it is always a little unnerving when there is a consensus trade. Jonathan i want to get you a check on where bonds have been this week. Twos, tens, and 30s on this shortened holiday week in the united states. That picture really, twoyear yields up on the front end. 30year yields down two basis points at the long end. A flatter yield curve once again. 2. 76 on 30s, 1. 74 on twos. Still ahead, the final spread. The week ahead, featuring jay powell before the Senate Banking committee in a fed chairman confirmation hearing, that and a little bit more. This is bloomberg real yield. Jonathan i am Jonathan Ferro for our audience worldwide. This is bloomberg real yield, live from new york city. Time for the final spread. Coming up over the next week, outside of cyber monday, the u. S. Congress gets ready to work on the tax overhaul bill. The effort continues elsewhere. The fed chair nominee jay powell will go before the Senate Banking committee for a confirmation hearing. Current fed chair janet yellen testifying in congress. Then you have the bank of england Financial Stability report and the opec meetings as well. Joining us is Lisa Abramowicz, rob waldner with investco, and alan higgins with coutts, over in london. Bringing up what possibly has been one of the biggest nonstories of the year, the concerns around the composition of the Federal Reserve. The chair pick has really been quite consensus. The names around the vice chair, very much in a similar vein. Is it something you need to worry about going into 2018 . Alan worry is pushing it but i think it looks like it will be somewhat more hawkish, judging by some of the names in the frame coming through. I would add, i would be interested to see if they continue to emphasize financial conditions. Because if you look at the fed tightening, basically, it is not really about inflation. As janet yellen said herself, it is a big puzzle, this low inflation. It is about growth. I think in particular, financial conditions, and bill dudley, knowing him from his Goldman Sachs past, he is heavily influential in the Goldman Sachs financial indicator. You have seen that mentioned in quite a few minutes or statements from people at the fed. So i would be interested to see if that emphasis continues next year. If it does not, maybe we will not see as many rate increases as expected. But i actually think they will. It is not just bill dudley, they really are focused on tight credit spreads, weak dollar, soaring equity markets. Jonathan lisa, what are we looking for from jay powell next week in the Senate Confirmation hearings . Lisa i think it should be easy and probably avoid saying anything too controversial or that telegraphs too much. The most interesting thing is that president trumps entire group is really counting on the fed to allow growth to pick up enough to make their tax plan work. You have to have a fed on board. Yet, the hawkishness people are expecting from this fed would go exactly against that. There is a huge dissonance here. It is hard to square with a conservative idea of a fed with the need for really a very dovish fed for this whole thing to work president trump. Jonathan we are going to wrap things up with a rapid fire round. You know the drill three questions, really short answers. You are all in your boxes. 2018, the yield curve flatter or steeper from here . Lisa flatter. Rob flatter. Alan flatter. It trends. Jonathan the u. S. Bund twoyear spread, wider or narrower . Lisa wider. Rob it will be wider. Alan wider. Jonathan the final question for you, chinese bond rout, contained or get ready for the pain . Lisa contained, because they have a lot of money. Rob contained. They have a tremendous amount of resources to throw at the problem. Alan contained. You are going to have to find more difficult questions, jon. Jonathan alan higgins coming in hot at the end of the program. Nothing left to throw at you. Great to have you with us. Thank you very much. My special thanks to bloombergs Lisa Abramowicz, rob waldner from investco fixed income, and alan higgins from coutts. That does it for us from new york. We will see you next friday at 12 30 new york time. 5 30 in london. This was bloomberg real yield. This is bloomberg tv. 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