We start with the big issue, dalios warning resonating from davos to new york. Take a listen. A 1 rise in bond yields will produce the largest bear market in bonds that weve seen since the 19801981 period. Has that bear market started . Are we in it . I think were in it. There will be a time the bank of japan and ecb begin tightening. There will be a time when arbitrage narrows and maybe when bond yields increase. I dont see that now, unless im wrong on inflation. I dont believe the federal will get the 10year to three point 6 . I dont think the bear market is starting. Since 1990 we had many, many predictions of a bear market in bonds, but it has not happened. Lisa joining me in new york is Subadra Rajappa, and Rachel Golder, and coming to us from london is Luke Hickmore. Alright, so i want to start with you, subadra. The big question is, has the selloff in benchmark bonds just begun, for is this the extent of it and will people pile back in . Subadra thats a good question. I think that there is still more room for bonds the selloff from here. We have seen them pricing higher over the last few months. And i think that we could probably go a little higher. But ultimately it depends on where the the fed funds rate is. The funds rate is still around 2 to 3 . I dont see a big upside from here. Lisa what is the threshold at which people will pile back into 10year treasury yields . They are at the highest level since 2014. We are seeing high levels here. Subadra you can see drips and drabs of demand from overseas. The yield differentials between yields in the u. S. And overseas is quite large. And i think we can see demand again from pensiontype accounts because the back end of the curve looks relatively cheap. So, i think you will see demand as we reprice higher. Lisa is there a Tipping Point . Subadra for how high they could go . We actually have 10 year yields ending the year close to 2. 7 or 2. 8 . So, we dont really have that much room for yields to sell off from here. Lisa luke, youre overseas. Are you buying treasury yields . Are you buying treasuries . Luke no, i wouldnt buy treasuries yet. If we get into a three maybe slightly higher context, that will be the attractive level to buy. It feels we could drift up as the year goes along and people realize three rate rises are baked in, maybe we get four or five, the dollar continues to struggle. That rises inflationary concerns as well. There is a lot of debt around. I think that will suppress future returns for all types of Asset Classes and growth. And probably limit where the yields can go, which is why i dont agree with ray dalio. Its going to be some shortterm pain. This isnt a bite a bear market in the sense of massive losses. This will be a correction to more of a fair value level. Lisa rachel, whats your base Case Scenario for 10year treasuries given the fact it is essential for Credit Investments . Rachel right, the shape of the yield curve is interesting. We do think the 10 year continues to move up. Its likely to reach 3 in the next 12 to 18 months. We expect three more hikes this year, and probably two or three next year. So we are maybe a little bit more aggressive than most on the number of hikes we expect, but to echo the point, on the longer end of the curve, we see healthier pension fund finance conditions with higher equity market and higher rates. You are seeing better funded status. That will motivate them to pivot out of equities into debt, which will support the long end of the curve. Lisa i dont understand one thing. The growing consensus is growth is picking up globally. Synchronized Global Growth is the catch phrase of the moment. And yet, why are we not seeing more of a rally . Why are we not seeing more of yields rising . Bonds should be crushed right now. Every news item has been terrible for them and the yield curve continues to flatten. Why . Growth is starting to pick up. We are still between 2 and 2. 5 . We might reprice in the second half of 2017, but for the most part, growth is still very subdued globally. It is better than what it was before, but we are not seeing 4 growth or really large numbers. And more importantly, i think inflation is extraordinarily contained, not just in the u. S. , but globally. And the third factor id say thats keeping bond yields relatively low is the fact there is a huge stock effect of Central Bank Holdings of bonds. So that, again, will be something that will prevent yields from rising meaningfully. Lisa alright, so luke, i remember when people used to care about negative yields and debt. I remember when people used to worry this would be a problem. No one seems to care anymore, even though the amount of negative yielding debt in the world is at 9. 6 trillion. Yes, its gone down a little. Not that much. Are you worried about this . Are you buying negative yielding debt . Luke im not buying negative yielding debt. I think european debt is really expensive. Actually it faces a lot more problems and probably closer to a bear market than u. S. Treasuries. You will see growth coming through in europe now. You are starting to see capacity come out of the system across northern europe, and even spain and italy are starting to see a lot of big improvements in the employment market. So for me, the german bund in the 50s or 60s is the wrong level. That should be 90 or 100. And that i think will end up taking a lot more attention than a trickle upwards in the u. S. 10year to the 3 level. Lisa so you think there could potentially be a violent unwind . Luke yes, very much so. And i think mario draghi was kind of telling you yesterday we will stop buying this stuff in september. If the bank of japan stops or starts to stop their program as well, that is a risk factor for the european bonds, not u. S. Bonds. Lisa wow. Rachel, how much do you look at the yield curve when making credit decisions . How much do you look at that and say, this indicates a falling down. That should be bad for particularly highyield credit. Rachel yeah, absolutely. Interestingly, the Investment Grade market is more correlated with treasuries. They tend to react more in line over short periods of time. They will inversely correlate. Spreads can come down. We saw that very much happening over the big rate rise over the last four or five months when we saw intermediate treasuries i look at fiveyear treasuries. High yield is a four year duration asset class. You saw them move up by 60 basis points. High yield spreads came down by almost 60 basis points. Still a positive total return. So the pacing of any selloff is very, very important. A steady leaking, wider rate can absorb positive total return. I do think that spreads are pricing in a very benign outcome. And we expect to pick up in inflation and volatility this year that are likely to exert some pressure on credit spreads, but more towards the back half of the year than the front. Lisa just walk us through the sort of contagion effect. Lets say there is some kind of mass selloff in negative yielding debt. How quickly does that translate into much higher yields in the u. S. . Subadra i actually agree with lukes comments on the fact i expect bund yields to rise more. I think overseas, whether in japan or germany, yields are a lot lower than they are in the u. S. So i think the selloff will be mostly led by what happens overseas. Whether thats going to be a contagion, i dont believe in that scenario. Because of the fact that i think central bankers across the globe are extraordinarily cautious. Theyre watching every metric. Even in the u. S. Weve we have even in the u. S. , we have had one hike per quarter. Thats very gradual. I think thats what will happen overseas as well. They will be extraordinarily careful and cautious. Lisa thank you so much. We will be discussing more. Sticking with us is Subadra Rajappa and Rachel Golder and Luke Hickmore. Coming up, the Auction Block. Emergingmarket bond sales at a record pace in 2018. From new york, this is bloomberg real yield. Lisa im Lisa Abramowicz. This is bloomberg real yield. I want to head to the Auction Block now. We start in the u. S. With a junk bond offering. Tmobile said it sold 2. 5 billion of bonds to refinance debt. The wireless carrier sold the notes in two parts following the collapse of talks with sprint in november. Over in europe, spain drew record orders for its biggest Syndicate Offering since 2014. Orders for the 10 year notes totaled more than 52 billion compared with more than 12 billion on the offer. And emergingmarket bond sales at a record pace this year as issuers scrambled to lock in low yields. Argentina to china, they have raised 65 billion in still billion in bond sales. Still with me, Subadra Rajappa, Rachel Golder, and Luke Hickmore from aberdeen standards investment. You can hear that my voice is totally going away. Welcome back and thank you for helping me out. So the big question to me is the biggest consensus trade of the moment is emerging markets. Everybody seems to be piling in. My question is, where is the opportunity left . And luke, i want to start with you. Do you see opportunity, and if so, where do you see it . Luke so ive been sitting in the emerging markets team this year. They are struggling to find the easy opportunities for sure. Even in Frontier Markets on the edge of those emerging markets and the things investors are interested in, even that part of the area they have been reducing their allocation recently. So, you know, they are looking at venezuela, argentina. They are having a lot of thought about mexico and the elections, but not getting too involved in these assets until they actually get to attractive levels. And i think we see those emerging markets spreads in the kind of 220 to 230 area, but a lot of that is venezuela. Because those yields have just blown up over the last few weeks. So, its still an attractive area compared to investmentgrade. But i think if you look at it in and of itself, you need to be more and more cautious and a lot more selective about what you do actually buy. So, you know, i think things like brazil, safer countries, they are benefiting from the oil price coming up like russia. These are better places to be invested i think in emergingmarket debt recently. Lisa rachel . Rachel at goldman sachs, we do still like emerging markets, but recognize they have gotten relatively rich. Local currency is still a preferred area. We feel that the strength of emerging market economies is still very, very compelling. But valuations have extended within the fixed income opportunity set. We do like being short u. S. Rates. We like securitized credit. I think in high quality clo liabilities and in Student Loans there are opportunities for really attractive yields. We are not negative on credit, relatively neutral based on valuations, but those are some of the preferred trades. Lisa do you agree with what you are hearing . Subadra yes. I think the macro environment is extraordinarily accommodative. You have strong Global Growth. You are continuing to see a very strong rally in risky assets. And youve seen some decent credit upgrades in countries like spain and portugal. Fitch upgraded them. We had a very good a very good demand for bonds globally. So any new issue that hits the markets seems to be well received. Lisa im struck by i want to move from emerging markets the u. S. Investmentgrade credit. Luke, i want to direct this to you. We saw another huge inflow into u. S. Investmentgrade bond funds last week. The spreads on investmentgrade credit in the u. S. Have narrowed to the least since 2007. You can see that with that chart right there. Does this concern you, luke, especially given the fact we are in a rising rate environment and we count on those spreads to absorb any rise . Luke so, it has been a remarkable start to the year, hasnt it . Spreads have gapped. Doesnt matter what currency you look at. We were hoping for spreads to have a more gradual pace this year, to have a chance to be selling these rallies rather than buying the dips. That is possibly the attitude we will be having as the year goes on. If we remain at these tight levels, well just be selling more credit. Its fine, fair value, not particularly expensive. Economies are doing well. Youre supported by xp markets hitting alltime highs on a regular basis, but you know it is a year or a year and a half and we will be running into problems with the economy and possibly with credit markets as well, so it is a time to be recognizing this is probably the best you get from credit rather than actually there is more to go for. Lisa so rachel, you focus on the highyield credit market. I want to look at that because spreads are similarly tight there. Im just wondering are there still opportunities . Where are you seeing that . Rachel absolutely. We are not at the extremes of highyield spreads yet. We have widened out materially in november. Weve covered half of that widening since then. They still compensate very adequately for the risk of defaults going forward, which is very, very low. We see the defaults less than 2 in 2018. However, rising rates dont have a lot of room to be absorbed in the spreads that exist. So there is some risk of widening spreads in highyield. Volatility is the greatest driver of that likely going forward, and we think that animal spirits will create more activity amongst corporate leadership. We think m a is likely to pick up. Weve already seen a degree of acceleration over the last couple of months. That will bring new supply to the market on the one hand. It will benefit the valuation picture. It should help the equity markets, as well. Investmentgrade companies who tend to be the buyers, they may see themselves leveraging more. Highyield companies are often the targets of that. So they can benefit from it. And another thing i want to mention on the highyield front was leveraged loans. They are a floating rate asset class. They still have relatively attractive yields and spreads relative to high yields. Higherquality. So they are a relative safe haven amongst the fixed income opportunities. Lisa alright, thanks so much. We will ask you to hang around. Luke hickmore, Rachel Golder and Subadra Rajappa here on set with us. We will be right back with more to discuss. Still ahead, the final spread. The week ahead features the fed decision, a state of the Union Address and the u. S. Jobs report. This is bloomberg real yield. Julie im julie, helping out Lisa Abramowicz on bloomberg real yield. It is time now for the final spread. Coming up over the next week, President Trump gives his first state of the Union Address. Also, fed chair janet yellen presides over her last meeting. The u. K. s theresa may visits china. We have another round of earnings with a heavy round of Technology Names reporting. And we get the u. S. Jobs report. Still with me is Subadra Rajappa, Rachel Golder and Luke Hickmore. Thank you all for being here. Were talking about the fed now, i think. Lisa were talking about the week ahead and what we are most focused on right now. Rachel, i want to start with you. Is the jobs report the most important thing to look at, the trump speech . What are you focused on . Rachel the jobs report, we dont think it will be that material this coming week. We do expect a fairly consensus highhundreds number that will continue to move the Unemployment Rate down. So, we think the market is expecting a pretty good jobs number on the back of it. The gdp number was a bit of a disappointment. But we call it a high quality miss, if you will, in that Consumer Spending and corporate spending were good. It was inventories and trade that negatively impacted it. We think the two good numbers there are good supports for the economy going forward. Subadra i think we could get a lot of interesting soundbites next week, especially given the state of the union. We could get some more for me as a treasury and rate strategist, the treasury announcement will be interesting. We might get some initial hints on how the treasury will be changing its financing over the upcoming months. The fomc meeting will be quite interesting given the fact it is Janet Yellens last meeting of her career. So i think its and all of these have the potential to get the market moving. And i agree with rachel. I think for the employment number, the focus will be on earnings because thats really where i think we need to see some gains. Thats what has really lagged. Julie in terms of the fomc meeting and Janet Yellens final appearance there, do you think we will get any more color from jay powell . Obviously, shes presiding. He will presumably defer to her. But do we get any more flavor for what we are in store for from him . Luke i think he is probably going to rely on his confirmation hearings to give people a sense of where he wants to go. And it feels very much like it will be a continuation of Janet Yellens approach. As jay powell comes in, this is all about janet yellen leaving. She will be given some space to explain how she feels about the economy and she will go off into a different realm. I dont think we get anything from the fed. Personally, i never have been interested in the numbers for nonfarm payrolls. It will be very volatile. Lisa what is the biggest economic indicator, rachel, that you are looking at that affects more broadly the u. S. Credit and frankly emerging markets . Because the dollar has been the story of the day, of the week. What could make it go stronger and actually disrupt a lot of the consensus trades right now . Rachel a single indicator, i would cheat a little bit and say the financial conditions indicator. It combines a bunch of things. I think the signals we have gone back to as loose financial conditions as we have seen since 2014. We think this means party on for the near part of the year. But as we go into the back half of the year, watching volatility, which has begun to move off the floor. If it does more so, it will decompress risk assets. Lisa it is time for the final rapid fire. We ask questions to each of you. And you have to answer really short answers. The first one is what is more likely to selloff in the next nine months, u. S. Highyield or investmentgrade bonds . Luke. Luke investment great bonds. Rachel u. S. Highyield. Subadra u. S. Highyield. Lisa alright, what is the better bet over the next three months, buying 10 year government bonds in greece or germany . Greece. Rachel the horizon is critical, greece. Subadra greece. Lisa the last one is, what is the more likely risk in the nearterm, unexpected big surge in inflation or unexpected big drop off in growth . Luke inflation. Rachel inflation. Subadra inflation. Julie alright, everybody agrees. Subadra rajappa, Luke Hickmore, Rachel Golder thank you so much. This is bloomberg real yield. Scarlet im scarlet fu. This is bloombergs etf iq, where we focus on the risk and rewards of exchangetraded funds. Scarlet we have more than 1 billion dollars flowing daily into passive funds. We discussed the distortions of the process. But a stunning lack of a volatility astounds. We speak with the executive