Selling treasuries but more about inflation showing up in the u. S. , the risk that keeps most Market Participants awake at night. The treasury market, it is more important what the actions are coming out of europe and japan. The fed unwinding its balance sheet, we have seen from the boj, they are making extrapolate,h we slow purchases as well. It is poised to stop many polluting the most important price in the world, the 10year treasury. 14 trillion worth of bonds bought by Central Banks in the past 4, 5 years. That appears to be close to an end. Market is not dead, it is just dealing in a bearish trend that a lot of people in the market have not seen before. , we have put in a structure secular low in yields, 130, 140 on the 10year. To say we are in a bond bear market is still premature. Jonathan joining me is matthew , andach, priya misra michael buchanan. Were you shaking this week . I dont think so. There were a couple of stories or under this week that said yields higher. Obviously, the inflation print this morning, a rare upside surprise. Interested in the inflation story here. Really, all of the things we saw this week in the bond market feed the confirmation bias of the bears. Give them everything able a want and here we go. Inya i think we all came looking for the big trade, and it is a big trade, this big bear market. I would argue not. But there is enough there. Bund yields rose. The fed was fairly hawkish. Certainly something, if you are bearish, we are not. It boils down to fundamentals. When we look at fundamentals, low growth, inflation maybe picking up, bolo by historical standards. Jonathan what does this say about the nervousness in the market . First of all, it was the boj trimming a weekly market operation. Then was concerned about china, what they may or may not do with treasury holdings. After that, a communication from the ecb. People worried about the prospect of forward guidance. What does it say that people are so nervous off of the back of those small events . Matthew this is the beginning of the year, people are ready to go, lets make money. As an are taking this opportunity to increase bets for higher interest rates. The interesting thing for me about the price action that we saw in german boones, after this, the curve flattened. If you are worried about a steepening, or you are positioning for a steepening in the u. S. Treasury market, you want the curve to steepen, you dont want it to flatten, but it did. Anyone out there with steepeners in the u. S. Will be confirmed at the curve did not steepen. Jonathan i was going to save it for later but i will go with it now. Versusead on bunds treasuries is wide and gets a lot of attention on the two yada yada. Something that does not get much curve is is the bund twice as distinct as the treasury curve. What is the story there . In a position where the ecb is downshifting their purchases, well telegraphed, everyone understands this. That is the first of normalization process. Ant will perhaps be to increase in deposit rates and further increase in the refi rates that the ecb has. First the curve steepens and then will eventually flatten. It is already flattening, thats whats interesting. Jonathan what is your view . Priya to the extent that the ecb will raise rates rather than reduce purchases. Quickly,ctually taper they stop buying. If they stop reinvesting, then it could have a pretty big impact on the periphery. The view from the market is they keep the brine program, they start normalization from negative rates, perhaps to zero. Therefore, the curve should flatten. I would say the spread in the front and is all about ecb action. Long end, that spread is too wide. Treasury bonds around 2. 5 basis point is arguing if prices can continue to rise. That does not seem to make sense. Thingan lets have some that does not make sense to people, the amount of debt outstanding that trade for negative yield. Around 7 trillion. There is enough in the market to scratch your head and wonder why we are still doing this. It can say shorter. That. L we have proven what this speaks to is, you look where the u. S. Is. On a relative value basis, u. S. Treasuries look reasonable when compared to a lot of european rates. Then you get into the spread sectors and it is common more compelling. Jonathan was the 10year option evidence of that, on the back of you will get sufficient demand . That is fair to say, outperformed what expectations were. That is a reasonable assessment. Just classicas after all the news that we saw earlier in the week, the backup, steepening. If the story on china had any credibility to it, which we dont believe it has, but if it did, the curve should not be steepening. It should be flattening. Most of the securities owned by Central Banks across the world are on the front end of the curve. Matthew what does this say about market practitioners, there was a story about what fx reserve managers in china may do, but it was not the front end that sold off but the long end. Priya i would disagree. The best steepening made sense. A lot of the buying from Central Banks in the last year has been in the long end of the curve. We dont have data on this. All im saying is somebody is taking the place of the fed and that is the official institutions, and the curve is flattening. If im a bond reserve manager, do i really want to buy fiveyear treasurys when the market is not pricing close to what the fed is projecting . Why would i buy the two to fiveyear sector. Maybe i buy further of the curve. I actually think foreign Central Banks may have been buying the long end. If they are stepping away, then the curve can start normalizing. Matthew you need to look at the last time Central Banks actually had to sell treasuries. He last time that was in 2015 as preas suggested, we dont have data on what they sell, but we know the last time the peoples bank of china needed to intervene in the fx market, they were, we believe they were selling on the frontend of the curve because we saw Dealer Holdings of the securities go up. Again, it speaks to the idea that if you need to let notional go, you will do it in the front end of the curve. Jonathan there is a huge political dimension to part of that story. Your thoughts on foreign demand, whether it is investors or Central Banks . It is not going away. Michael we are not seeing evidence of that institutionally, evidence from a retail standpoint. Demographics support that. There is still very healthy demand broadly for fixed income. We dont see it going away. Jonathan all of you will be staying with me. Coming up on this program, the auction block. The worlds oldest bank comes back to the market one year after a government rescue. A remarkable story this week. Jonathan from new york city, im jonathan ferro. This is bloombergs real yield. We begin in asia where tencent sold 5 billion of bonds. The biggest u. S. Dollar offering, the first time it issued debt since 2015. It drew comparisons to alibaba which sold 7 billion in november. In europe, monte paschi received orders to more than triple the subordinated debt it offered. Milliond more than 900 a year after imposing losses on 5. 2 billion of junior bonds during a government rescue. Restored in order treasuries, 56 billion in , the highestgs level since 2014, while the 10year option was at the strongest since 2016. Treasury auctions calming down. The 10year according to the highest level in 10 months. Bill gross declared a bond bear market. 10year treasuries which are at 2. 55 probably over the year will go to 275, 284 number of fundamental reasons. That is a bear market but it does not really significantly affect total return in a negative way for bond investors. Euroaves them flat for the 2018. Jonathan still with me, Matthew Hornbach, priya misra, michael buchanan. It 0 is a bond bear market, sign me up. Ont think that treasuries it is hard to draw a downtrend line for the past 25 years. Jonathan but you know we will do it. Just going to drive a 20 fiveyear line for treasuries. Matthew you should do the same for the jgb market. Youll discover unless you expect boniors ago into 10 territory, eventually, those downtrend lines will be broken. Lets think about it from a total return perspective. It zero is the worst we can expect, then given where equities are, it is not that bad of a buy. It is a great edge in zero is the worstcase scenario. Say 3 or higher as a bear market. I think we are far from it. 2. 65 is already priced into the forward market. If you think 10 basis points above what they are pricing in, that is not a bear market i would argue. Michael it doesnt feel like a bear market. You go back to year, we were at or near the levels, great opportunity to buy duration. Proved to be a head fake. That related to fundamentals. I still see fundamental suggesting rates are not overdone here. You could see movement lower. To strip backnt what is happening with yields, the inflation component. Inflation expectations are rising, but premiums in the u. S. Are not picking up. Would have thought any recalibration of Inflation Expectations would have been a catalyst for higher term premium in the u. S. In the treasury market. What is happening . Today, weutting aside had a great cpi report today, breakevens are probably up based on that. If you look at the past three months, which is where we have seen the muster maddock widening in breakeven inflation rates, my view is that was a more nominal treasury supply story. The market became refocused on tax reform, tax reform was signed by the president in december, it came on the higher end of our expectation for the impact on the deficit, which means the treasury will have to purchase issue more. That is what is being priced into the market. Breakeven inflation rates were less of a global reflation story. Simply there is more nominal coupons hitting the market this year. Jonathan do you share that view . Michael i dont think i could say it any better than that just did. Tax reform we will probably talk about that but that plays into this. And probably filtered into how the market reacted. From a supply perspective, but what about an economic fundamentals perspective . Does the tax bill change your views on the potential for higher inflation is here . The margin it does, it is additive to economic growth, but you have to put it in perspective. We are talking less than a half percent. Nearterm benefits will be noticeable, but over time, that goes away. Priya i think we heard from the fed. They need to be taken in context. They are telling us they will hike. Fedeard from new york president dudley. Not that concerned about inflation. That is why breakevens have risen while inflation term premium has not. Inflation picking up, the fed says we are going to hike three times, we will hike in 2019, so the idea that they may be behind the curve is not there. So therefore term premium remains low. Inflation risk rises because you have the fed trying to push back. The whole tax story is making them more likely to hike this year. Prettyn you all seem constructive on the 10year premium in the u. S. Looking at the situation with bunds versus treasuries, a lot of you have talked about the attractiveness of 10year treasuries versus bunds, but that disappears when it is currency hedged. Matthew thats accurate and you look at european highyield trades, inside of 3 , 2. 8 . That twoyou convert u. S. Dollars, that adds about 200 basis points. You have to factor in that currency translation. Important but does not really take away from the story. There is a big gap between bunds and treasuries. That trade is exploitable, one that you want to take advantage of. We are. That,w i would add to not every investor currency hedges. Central banks do not currency hedge. There are Pension Funds in the world that do not currency hedge. There are Life Insurance companies that do not currency hedge. There are different types of investors in the world, they look at things in different ways. For those that dont currency hedge, the treasury market is the best place to be. Jonathan going to credit now, remarkably solid coming into the new year. Rallied a lot higher than many people thought it would go, never mind in the first couple of weeks. Have you been surprised by what we have seen in the early part of the year . Ichael maybe to some extent if you look at the past two or three years, going into every year, most investors could contract a bearish story on credit. It was always around valuations. I think you have to put about the rations in the context of fundamentals, and fundamentals are very supportive. Like i said earlier with tax reform, they are about to get even better. Valuations should be compressed, spreads should be tight. It is not a table pounding opportunity but we are finding opportunities. Is your view predicated on a treasury market that behaves itself . Michael yes, to an extent. Credit can do well, reasonably well, even if rates rise. 3 10year goes to 2. 55, throughout the course of the year, there is room for spread compression. Quicker acceleration of that, it starts to damage fixed income and spread sectors. Jonathan i had this conversation with blackrock earlier in the week, i asked, are you do you risking . They say it is right at the bottom of equity, not credit. Our ud risking, and is there a difference between that and saying the optimal place is not in credit and highyield, but right at the bottom in equity . Ing and that issk the byproduct of valuations. As they look less attractive, it makes sense that ud risk your portfolio. That means selectively selling highyield, keeping our best bets on, keeping our emergency market positions. Jonathan anything in highyield and you are selling off and you can tell us about. The lowerome of quality. We are taking gains in the triple cs, single bees, concentrating more in the double bees. We think there is an upgrade story in the double bees. You will see anna norton a number of upgrades from double be in the next year and a half. That is something that investors can take advantage of. Jonathan Mike Buchanan will be sticking along with us alongside Matthew Hornbach and priya misra. The treasuries are the stories. For theire through 2 First Time Since 2008, up or basis points for the week. Higher on the long end as well. 2. 87 on the 30year treasury. Feature more Bank Treasuries and a potential Government Shutdown. This is bloombergs real yield. Jonathan im jonathan ferro. This is bloombergs real yield. Week, ap over the next shortened trading week here in the u. S. With equities and bonds markets closed for Martin Luther king holiday. U. S. Bank earnings starting tuesday, bank of canada decision, china gdp, and potential u. S. Government shutdown. Everyone is still with me. Of your question for you, priya. Do you think the bank of canada will hike rates next week . Are not looking for a hike. We are looking for two hikes in the which is the market consensus. The debt overhang and canada cannot be overestimated. A lot of their dead is floating rates. The bank of canada hikes too fast. If they start hiking now, the market is pricing in for this year. You wonder about what all of that overhang does to the consumer. Even though we are not looking for a hike, we are also looking for a few extra the course of the year. Onathan getting your view something else, possibility for next week, a Government Shutdown could be the obsession in washington, d c certainly not in wall street. Not on anyones radar. Kind of like, they will sort it out, it doesnt matter. Michael we think they sorted out here and one thing to watch closely is spending that comes as a result of that agreement. I dont think the market is fully pricing in, you could get some cohesion between the president and congress on military spending, nonmilitary spending, and if that comes together in a meaningful way, that could be pretty powerful, lee to some curve steepening. An agreement is worked out by the end of the week. Are of the same mindset, we believe the government, want to try to avoid a shutdown at all costs. There are clearly some issues on the table, daca, Border Security that money to be hashed out. From our perspective, most likely outcome is there is a shortterm extension while they continue to be these other issues come in which are important to the process. Three questions, short answers. We will wrap up the last 30 minutes and look ahead to next week. Do you sell him for the bear market drama or do you buy it . Adjustm preemie and . Igher this year on treasuries michael i was a higher. Jonathan Duration Risk or credit risk. It is a question i ask sometimes. Matthew duration. Priya duration. Michael i was a credit risk. Jonathan you have got to. Great to have you with me. Hornbach, matthew buchanan, and priya miserable. See you next week. This was bloombergs real yield. Washington,0 in 6 00 in london, and 2 00 in hong kong. Welcome to bloomberg markets. Here are the stories we are watching this hour. President trump steps back from a deal on immigration and manages to offend haiti in much of africa in the process. Hear from john kasich, governor of ohio and former president ial candidate about why he sees the president ials approach to immigration antithetical to the family values of his party. And Angela Merkel moves forward in her quest to put a governing coalition together, finally, for europes largest economy. Shery it couldve been a done deal on daca but it has broken down after President Trump made incendiary remarks that we must not repeat here about haiti, el salvador, and african countries. The comments came in an Oval Office Meeting with a group of senators who are