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. This Unemployment Rate is 4 . 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. It is what we have been talking about with you for the last year. It was really the impetus for our tax plan 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. Great to have you 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 to me has fundamentally changed in the last couple of weeks. This story existed for months, yet suddenly the treasury woke up. 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 up. Jonathan lets get that yield down, how much every repricing that we have seen so far has just been about investment expectations . Lisa i think you have seen a big move of inflation break even which tells us some of it is coming we now start to see it move higher which tells there is , growth in inflation coming through, and potential growth is maybe higher and tax reform is stimulative. I think the other part of it is of course Central Banks are buying a trillion dollars less assets in 2018 than they were 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, work up until this payroll report, the fed was a market catching up to a confluence of factors. You talk about synchronized Global Growth in 2017 and early 2018. Monetary policy, whether it is the fed raising Interest Rates and shrinking its Balance Sheet or the ecb buying bonds at a , slower pace than it has in the past. From a monetary perspective, the tax reform, all signs 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 curve,ing of the 210 the market came in to a flatter curve. Typically when the fed is raising rates, the curve is flattening. The last six rate cycles, we have seen the curve flattening in five. 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, they are looking at they need to fund another 300 billion of treasury debt that needs to come from somewhere. There is a possibility they will extend given how flat the yield curve has gotten. Jonathan is this 1986 . Kevin i dont know if it is but we have seen the curve 1986, steepen 68 basis points. The steepest it has been since midnovember of last year. Jonathan when you put it like that. So dramatic. Kevin it is not 200 basis points, but its not 40 either. 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 when we get some good, strong growth and a surge in treasury prices and we get hopeful inflation that drives Interest Rates higher, peak in turnit down before the end of the year. Jonathan you like the treasury at 280 . 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 in european sovereign yields. 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. That seems modest given the data. Jonathan lets talk about that, not just europe but japan as well. The boj 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 . Is this craziness . Lisa you couldnt have said 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 because of purchases is in credit markets rather than an eating treasuries. Guessing tremendous amounts of overseas buying, 45 of the u. S. Corporate market today is overseas versus 25 10 years ago. We have seen the distortions are coming through risk assets i think more so at this point than three rate markets through rates markets. 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 that trade still be good now that italy is starting to see some inflationary pressures . Some of these other European Countries are seeing inflationary pressures. Does it make it a value back in other sovereign debt versus the 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 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. 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. Given the pressure on global yields and the strength of the japanese economy, i think being short of the 30 year part of the jgb curve is a good place to be. Jonathan you had to be short jgb or bu would it be nds . Kevin it would be bunds. One of the greatest monetary failures seems to be japan not raising its rate. It seems to be a 30 year, a 40 year issue. I do think we are about to see some higher rates in germany in particular. Jonathan 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 quarters. 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 billion in january, a drop of 3 since 2017, and marks the lowest total in that month and three years. In three years. Tesla sold nearly 550 million of bonds. The company was able to slash the risk premiums. Still with me around the table lisa hornby, kevin giddis and eric stein. Kevin, youve got to say we have this selloff of risk assets at the moment. Selloff in treasuries and 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 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 some cracks starting to appear, but the role right there, equities over. Are you surprised by the fact that comparatively so, the credit estate is resilient . Lisa it is hard to say that equity is really rolling over given the rally we have had over the last few months. With rates growing higher, highyield has 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 four continuous weeks of outflows in the highyield etf space. From the valuation perspective, we are through cycle types and about 35 basis points off of all 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. The way we think about it, we look at risk factors, spread. Dont think about an etf but a spread of a highyield bond. Spreads have been tight and have widened the last couple of days given the risk of selloff, but some of the decline you have seen 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. Right now, it is a higher rate repricing leading to some stress in the credit 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 any material way. 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. I think the market is forgetting about that. I think italy has not participated in the selloff in rates last few weeks. This is it a market that is materially mispriced. Jonathan mispriced by how much . The reason i ask this question the timewhat is arising for this trade . Is this something that is going to have more sustainable upside . 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, and are stepping away from that 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 an hour 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. 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, they trade more like a rates market. Without duration volatility, it grinds tighter every day, so a lot of fundamental problems with italy and there could be some volatility 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 market begins clear, it will trade like a credit market, less like i should say more like a rates market based on fundamentals and less like a credit asset. 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. 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 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 you start thinking about the ecb postdraghi . Lisa i told you i am short btp s. 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. It is a totally different set of 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 headline says he is the next president. Do you react to that, should you respond to that . Kevin not immediately but i think 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 could you imagine the damage that would be done to the eurozone economy if you have an aggressive repricing of sovereign yields and credit because mario draghi was gone, and lets say you have more of a conservative central banker in the hot seat . Why would they want to do that anyway . Eric you bring up a good point. Certainly, wiseman has a different view on the world as draghi. Given where europe is in the business cycle, it might matter a little bit but not that much if we have another european sovereign debt crisis then it , would matter a lot. I like to go back and play the hindsight game. If he had been there, would he have done the draghi speech in 2012 . In a benign state of the world, it matters a little bit of the value of the euro and Italian Government bond yields, but it is a crisis situation that matters a lot from a policy perspective. Jonathan he was busy hiking rates, wasnt he when maybe he , should have been cutting them. Guys, great to have you with me. We will wrap things up and go to the final spread. To the rapid fire round, where i ask you a quick question, and a quick reply if you can. Lisa, kevin and eric. We begin with the selloff in treasuries as we approach 3 on a 10 year. Do you fade the reflation trade, or accept that 3 is coming on the u. S. 10 year . Lisa buy at 3 . Kevin definitely buy at 3 . Eric i accept that it is coming. Jonathan we talked about the bank of japan and how aggressive the boj has been, coming into the market and offering to buy a limited amount of bonds to cap 10 year yields at 0. 1 . If i offered you the following decision buy or hold 10 year jgbs or 10 year treasuries lisa . Lisa treasuries. Kevin jgbs. Eric jgbs. 10year, not 30 year. Jonathan because you are short the 30 year. We have got that. One we know that lisa , is short italian debt. This is the decision she has to make. Italian sovereign debt or u. S. Highyield through to the year end . Italian sovereign debt or u. S. Highyield. It is credit risk in europe or the united states. Lisa neither one of them, treasuries. Kevin i will stick with high yields. Eric stick with high yields as well. Jonathan guys, it has been great to catch up with you. Thank you very much for revealing some of the work you have been putting on in the last couple of months. Lisa hornby, kevin get us, and is, and eric gidd stein. That does it from new york as the selloff continues in equity and treasury. Well see you next friday at 12 30 p. M. New york time. 5 30 p. M. In london. This was bloomberg real yield. This is bloomberg tv. Scarlet i am scarlet fu and this is bloomberg etf iq where we focus on risk and rewards offered by Exchange Traded funds. Scarlet doing good but not getting much love in return. Investors are urging companies to be more socially responsible and focus on Good Governance so why arent flows backing up the rhetoric . With the bull market in full swing, we cannot help but to look at the next downturn and ask how much money would lead actual mutual funds today if it were not for unrea