2 . 1. 6. Cpi is 1. 7 or that allows the fed to go slow. Gradually pushing inflation back to normal, we dont see anything that will push inflation to levels where becomes a market issue or forces Central Banks to accelerate rate hike plans. You should probably start to tighten when you see the whites of the oz of inflation the eyes of inflation. This isnt anywhere near the whites of anybodys eyes. We want some duration on portfolio, but too much duration is risk. We dont think this trend is going to be structural. It is transitory in nature. The bond markets continue to be distorted. It is extraordinary to see. We just talked about u. K. Inflation heading out, putting pressure on inflation rates all over the world. On markets are still not responding and appeared very stretched. Jonathan joining me around the table is George Rusnak of wells fargo, kathy jones, fixed income usategist, and coming to from atlanta is matt brill of invesco. You, lets start with inflation for the weekend which was most important chinese api or u. S. Cpi . Kathy it is hard to translate chinese wholesale prices through to the u. S. And the rest of the world. I think the u. S. Was significant. Yields last year year just north of 2 . I think a lot of that was the result of the pulled back we had of the risk off trade coming back. You are seeing risk off coming back. Yields are reaping up more than inflation. Jonathan the chinese number at the start of the year was vertical for the reflation trade. Will it be important in the coming months, and can we maintain that trend . Commodityything but a rebound fueled by a weaker dollar . Kathy i think they are both what we are seeing in the data. We had a pullback in the dollar against chinese young, giving us a rebound in Commodity Prices and hurricanes from in there. I dont think there is much more to it. Jonathan in terms of inflation data globally, the u. K. , china, the u. S. , it has started to grind higher. The bank of canada has started to make a move, and the bank of england is talking about making a move. Calibrated orlly addressed what they think is going to happen with the fed. What you think that is . Matt we think the fed is going to hike in december. That met we got cpi expectations. We expect the fed to come around by the end of the year. Jonathan in terms of communication, the fed spent so much time trying to talk to the market, the boe spends years talking, the bank of canada just doesnt. Why doesnt anyone else just do it . Kathy this is part of their strategy to not shake things up. The problem now is we have them and somethingng else. It is hard to interpret when they are all saying different things. Jonathan we will get the summer of Economic Projections in the Federal Reserve, what is it worth for next year and the year after one hardly any of us have a clue who is going to be at the fed . George there are some changes coming on board with chair yellen. Expectations have not been as good of a predictor of what is going to happen. They have been coming down dramatically. We expect to see them forecast three interest hikes next year and that could come down to two next week when they release that number. Jonathan we have the bank of england talking up a rate hike. Inflation in the u. K. Is at or. 3 . A lot of people are questioning when wage growth is really going to take off. Washing the u. K. And bank of england have so much conviction in those old economic models that in the last several years dont seem to have been working so well . Matt they have not really work for anybody. Im not sure why they would have any conviction. The devaluation of the pound postbrexit, so i think we have to see if you a few more numbers to see. From october, i think youll see pullback in quantitative easing. We hardly seen them stop buying corporate credit. Jonathan in a couple months we will get the Inflation Report from the bank of england. I have seen this movie several times since 2014 when Governor Carney first went to the Mansion House and talked up the prospect of a rate hike. He was called the unreliable voice, because he did not deliver. Why is this time different . Kathy other than the valuation of the currency, i dont know why this one is different. Primarily by the currency. We will see if the economic prospects postbrexit dont look so good. Adjusted tolt has the prospect of rate hike. You have mentioned the politics, the forecast from the bank of england, i dont know what they are worth either when no one knows what the relationship with the European Union will be. How can these guys hike when they dont have any clarity on what the future holds . George it has been a dramatic shift. When you think about where they were, they were in a waiting phase until march of 2019, now it is may have 2018. They have actually moved it now to this year, october or november. What you are looking at is inflation tick up to 2. 9 and above 3 . It is moving significantly. Jonathan why can we have a similar Unemployment Rate to the u. S. , yet the market is seriously thinking about rate hike for the bank of england announced much the Federal Reserve . Why is the Market Pricing in more rate hikes for the giving want them the Federal Reserve bank of england than the Federal Reserve . Inflationhavent seen in the u. S. In the u. K. , inflation is mainly caused by fx. There are wage pressures in the u. K. That are real. You are not seeing that in the u. S. , and you are there. The u. S. Has been such a tough problem that they will be more accommodative in the future. Jonathan you are sticking with us. George rusnak, kathy jones, and matt brill. Coming up, the Auction Block, what a week it was. The headline is the yield. That is next. Jonathan i am jonathan ferro. This is bloomberg real yield. I want to head to the Auction Block where we had eyeopening debt sales this week. The yield for the 10 and 30 year treasury auctions seeing totals we havent seen in years. Sinces the lowest november. The 30 year yield the lowest since october. Austria saw demand for the 500 million of its 10year notes that were so high it not 90 basis points off the initial offering. Att allowed them to sell 7. 125 , allowing them to sell at dish the country sold 3. 5 billion euros of debt, the biggest ever sell of bonds out of europe. George rusnakis of wells fargo, kathy jones, and matt brill of invesco. Your reaction . Kathy i am stunned. It seems as if people believe in a deflationary trend persisting for decades in europe, otherwise institutions that need to own longduration, i dont know who would buy. Jonathan that was the size of the order book. A lot of people wanted to buy it. Kathy i think it was desperation for any sort of positive yield. When your choices between negative and positive, they will take positive all day long. Jonathan just in terms of the Duration Risk, we can do that on the austrian debt, what does it take to get a 5 or 10 move . We just need to back out 20 basis points, and you will get a 10 move. The duration people are taking is quite significant. It is. I dont know if they are looking at it totally from a return respective. I think there is just a tremendous demand for duration assets, and this is feeding that demand. I dont think it logically make at,e to buy 100 your debt if you have to have a, this makes sense. It certainly makes sense for the issuer, does it make sense for the buyer . I am not so worried about austria doing a 100year debt deal. It is a reach for yield. Insurance Companies Need duration. Invesco, we have a simple rule, if you cannot find something on the map, you dont buy it. I dont know where to take a stand is, so we would not buy it. This week, that is a lot better to buy for the term. Jonathan it was in the prospectus, they actually put the map of where it is in the prospectus. People still bought it. You mentioned some names. Where do you think people are still graduate gravitating towards, Duration Risk or the kind you would buy from tajikistan . U. S. They should be buying credit. You either have to sacrifice credit or liquidity. When you buy 100year bond, you have to sacrifice liquidity. We are not willing to do that. We think we will be much better off in the future because of that. Jonathan after 15 years, he shut down that fund. This is what he thinks is the most distorted market on the planet. Take a listen. Inevitably there will be an air pocket. Where is your protection . In protection terms, i think the most distorted asset class in the world is the twoyear german bond. People are willing to lose 75 basis points a year for security. You dont need that security. It is the wrong trade. Jonathan that is a stubborn trade. Kathy the problem is we have been saying that for how long now . Jonathan quite a while. Kathy people get tired of fighting the trend. It doesnt make sense. I am not willing to pay the government of germany for the privilege of buying their debt. Jonathan the depot rate of the ecb is 40. They are talking about going back. But they havent really moved. They are pulling back on qe, but not necessarily on their rates. Negative seven basis points doesnt make sense, but it does when 40 basis points is your alternative. In an absolute perspective it does not. At some point you get through quantitative easing, then you address rates, then you see significant moves. Jonathan will this happen in the next several months when the ecb finally communicates what is coming next . I think it is more a 2019 story. 2018, they are setting the path forward. They will be picking up the pace in 2018, and 2019 they will start picking up rates. Jonathan how much risk is in Investment Grade credit . Given the fact that ecb has been buying corporates, you see how europe is price. Certainly some of that has bled across into europe. Effecte see the domino buyingthey have been 10 of all new deals. They were buying 10 billion euros a month earlier in the year. Now they are buying five. There is a structural demand for credit and yield. Even when Central Banks are starting to pull back, we dont think you will see a complete unwinding of the situation. Jonathan stick with me. George rusnak, kathy jones, and matt brill. We will get a market check on where yields have been for the week. 15 basis points on the 10year. Kissingt week yeartodate lows. Onet yellen and details shrinking the fence Balance Sheet. This is bloomberg real yield. I am jonathan ferro. This is bloomberg real yield. Coming up over the next week, a week full of politics and monetary policy. Donald trump will make his first u. N. Appearance. The general debate at the general assembly. We get right decisions and news conferences from the fed and boj. Well have news and interviews from the number World Business forum in new york. Still with us is George Rusnak from wells fargo, kathy jones, and matt brill from invesco. Kathy, i want to look forward to next week. What is your sense of the treasury Market Positioning going into next week where we could get the unwind of that massive Balance Sheet . Kathy were have had pretty sizable bounce off of the lows of this week. I think what janet yellen says will be dovish, and the unwind will be slow and gradual not have a big impact in the short run, leaves us vulnerable to surprise on the upside. Jonathan 220 are we more appropriately priced going into this week . Could back upings a little bit before yearend. This particular meeting will be focusing on the Balance Sheet and not necessarily raising rates. Jonathan what is the main thing you are looking out for, matt . Matt we think they will continue to be transparent, walk you through every step of the way. They dont want any surprises. Back on them in trouble in the past. We saw taper tantrum. They dont want that. Are listening to what they will have to say and what they will try to end things. Jonathan will we get the summary of Economic Projections . We have laughed about it before. 2018, basis of yearend they are seeing rates pretty much where the 10year is now for the fed funds rate, just north of 2. 10. User someone is really wrong, the treasury market or the fed, or the yield curve is just want to look like this, deadline. Dead flat. Kathy someone is wrong. I think the fed will probably bring down some of their dots. We will get 2020 now for the first time. Jonathan for whatever that is worth. Kathy as you say knows who is going to be in charge. I think the market is too complacent about the risk of fed tightening. I think the market is just not discounting and a based on the history of the fed being run. Jonathan i wonder why they are complacent now. Where are they going to come from . Kathy if we get more of a bounce in inflation than the market is expecting now, and they are not building in any premium for inflation. George perfect time for them to build up their Balance Sheet. They have wanted to talk about this for a while. If they do it right, it cou ld steepen the yield curve. Jonathan yes, treasuries have not done much in anticipation of this Balance Sheet move. Aing really believe unwinding 4. 5 trillion Balance Sheet is not going to cause ripples in the market . Underweight mortgages. We think 2. 20 is not the right number. Is0, 2. 60, we think that close. Jonathan we will look back on the last week and 20 minutes and ahead to next week as well. One question, one word answers or limit those if possible. England or the Federal Reserve, nexxt to hike. George bank of england. Kathy the fed. George bank of england. Or austria . Year matt none of the above. I will take has you stand through the end of the year. Germann is shorting the twoyear the new widow maker on the yes or no . George yes. Matt yes. Kathy yes. Jonathan thank you for joining us, George Rusnak, kathy jones, and matt brill. We count down to that reserve decision with janet yellen next week, full programming here on bloomberg tv and bloomberg radio. That does it for us. We will see you next week. Kong, watch hong the replays over the weekend. This is bloomberg real yield. P. M. In new york, 5 30 p. M. In london and 12 30 a. M. In hong kong. Welcome to bloomberg markets. From bloomberg World Headquarters here of the top stories that we are following. Investors are shrugging off the latest provocation from north korea as the rogue regime follows a second missile over japan. We break down the market moves. Googles Parent Company is possibly setting its sights on a major stake, and reasons behind the move involves uber. Giants, what they are saying about the latest geopolitical turmoil. Shery lets kick things off with a check of the markets. The major averages, we are looking at another