The yield curve almost always flattens when the fed is putting rates up. 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 immense with which it has flattened recently. Mencee immense vehe with which it flattened. You have lots of Central Banks around the world, even if the u. S. Is going back. The bank of japan expanding a program. Ecb is very involved. You are not seeing Global Central Bank purchasing winding down. Between 50 and 0 is the flashing sign. Things are starting to get a lot more challenging. Above 50 you can kind of explain it away. Well,equities are doing 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 us is Lisa Abramowicz, rob waldner, and joining us alan higgins from , london. I want to begin with lisa. Go to the chart we have been talking about for when i feel like is some weeks. Twos versys tens. Pick your place on the curve. 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 saying this is typical. That said, as i were jersey of ira jersey of Bloomberg Intelligence noted this is pricing in a policy error. Right now this is saying a 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, do you agree with that statement . Is that what you see in 58 basis 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 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 and growth. At which point are the 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. One is the flattening yield curve and the other is a tremendous amount of attention for a long time now, bunds treasuries, twoyear, and this aggressive widening we see 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 here. I wonder if the fed can go it alone. Lisa here is the weird thing. When you have the u. S. Tightening or one Central Bank Tightening and the other 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. If that is not happening, you will not have a stronger dollar as a headwind and 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 in london. It is always great to catch up with you. It has been far too long for you and i. Talking about the front end of the yield curve bunds twoyear , versus u. S. Treasury twoyear. And its aggressive winding, north of 240 basis points. My question is whether the Federal Reserve can continue going alone from here and if thats right can continue to get wider . Alan nice to talk to you. We think it will continue to go wider. For fixed income investors, they do not want to take a currency risk. They cant catch all that spread. If you hedge it out with 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 is hiking 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 but deals have gone nowhere. It is the same in the united states. Why are we here with bunds at 40 basis points and treasuries around with the data where it is 2. 35 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 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. And 30s so. S. Tens resilient . Having traded fixed incomes virtually all my career, one thing i learned quickly is the hardest thing 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. Obviously the income stream is low, at the 10year and the 30year know. 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 was dealing with dealing with not so long ago, the goldilocks scenario. 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 typically with rates and yields as low as they are you have a decision to make. ,you either add duration along the curve, or you go further along the risk curve which means lowering quality. In europe that will be difficult to do. Highyield already trades so tight. If you want 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 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 are 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. They are low. Jonathan how would you express that positive view of europe . What is the 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 famously. 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 europe, 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. In financialing credit. There is still a premium. They 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 serco 3 , not soupy highyield but super highyield, but in the context of bunds. Jonathan would you continue to buy cocoas from here . You looking for more capital return . Where is the upside . What you looking to get from that specific trade . Alan it is more income, a tremendous rally. Short dated cocoas have fallen to low yield. Essentially, you are still competent compensated. It is in excess of subordinated Corporate Bonds we have over here, then you market in europe the newer market in europe, the socalled hybrid bonds. We carefully chart the spread of cocoas with 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 2009 and 2011, 2012 in National Champion banks. Jonathan interesting stuff. Lisa abramowicz, rob waldner and alan higgins will be sticking with us. Coming up on the Auction Block, a 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 or state governments moni bonds have swelled to more than 22 billion, the most since october 2016. Africa,e, over in nigeria raised 2 billion in a twopart offering sale. The nation split the offering equally with the issuer receiving a lowly and 11 billion worth of bids. Companies sold billions of new bonds this week. Contingent convertibles, cocoas as they are known, investors wanted seven time as much as was offered. That was a discussion we had previously. Still with us Lisa Abramowicz, rob waldner, and alan higgins. Another big story throughout this week has been china and its aggressive spread widening. 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 in costs become onerous and it becomes disorderly. There is a very narrow face in between those scenarios that 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. Chinese capital controls have have have been very effective since they put them in place the beginning of last year. But 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. , 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 risks when it shows up. This is catalonia. 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 in 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 in our philosophy. We did not catch catalonia unfortunately, but 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 a 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 up 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 degree. They pushed through the Deleveraging Campaign and every time there is a little bit of pain they back off again. Why is this time different . Alan that is a fair point. I would say, the chinese yuan is so idiosyncratic. The u. S. Dollar has really weekend off in the latter half of the year, and the chinese yuan has been strong all year. And 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. Tentative signs they are moving the right direction. Jonathan rob, i want to turn to you and get your thoughts on em more generally. What is 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. It is good for em. China has committed to this one road programs which is a massive investment across a number of different e. M. Countries which is positive. All those are positives for e. M. , tailwinds for e. M. If you like. We would look for e. M. 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 for inflation or financial conditions so you buy. The same is true in a number of corrections we have seen this year. Jonathan final word, lisa . Lisa i think emerging markets have been a sweet spot. It remains to be seen if it will be as immune to some kind of pull back in developed markets or slowdowns 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 dig. Lisa no, not a dig. It has been an amazing run. It is always a little unnerving when there is a trade. Jonathan i want to get you a check on where bonds have been this week. Twos, tens, and 30s. That picture really, twoyield up on the front end. 30year down on the long end. A flatter yield curve once again. 2. 76 on 30, 1. 74 on 2s. This is bloomberg real yield. Jonathan i am Jonathan Ferro for our audience worldwide. This is bloomberg real yield. Time for the final spread. Coming up, outside of cyber monday, the u. S. Congress gets ready to work on the tax overhaul bill. The effort continues elsewhere. Jay powell will go before the Senate Banking committee for a confirmation hearings. Current fed chair janet yellen testifying in congress. Then you have the bank of england Financial Stability report and the opec meeting. Joining us is Lisa Abramowicz, rob waldner and alan higgins over in london. What possibly has been the biggest nonstory of the year, the concerns around the composition of the Federal Reserve. The chair pick has really been quite consensus. The names for 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. When you look at the fed tightening, basically, it is not really about inflation. As janet yellen said herself, it is a big puzzle with low inflation. It is about growth. I think financial conditions, and bill dudley, knowing can from his Goldman Sachs past, 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 what are we looking for from jay powell next week . Lisa i think it should be easy and probably avoid saying anything too controversial or telegraph 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 worked. You have to have a fed on board. Yet, the hawkishness people are expecting from this fed would go against that. There is a huge business here. It is hard to square with a conservative idea of a fed with the need for really a very dovish fed for everything to work president trump. Jonathan wrapping things up with a rapid fire round. Short answers. You are all in your boxes. 2018, the yield curve flatter or steeper . Lisa flatter. Rob flatter. Alan flatter. It trends. Jonathan the u. S. Bund twoyear 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 have to ask more difficult questions. 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 and alan higgins. 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. Megan as the media landscape changes, hbo chairman and ceo Richard Plepler believes his company is entering a golden age of brand. Richard what people count on us for is the curation of excellence, and what we have to do to continue to grow is keep delivering on that. Megan and delivering on that excellence stems from the people. Richard our best Brand Ambassadors are the talent who talk about working at hbo. We cant do better than that. Megan it is this core of talent that plepler credits for hbos biggest hits. Me and youd together, that is the new pecking order. Megan and growing subscriptions of reviewers that have more choices now than ever. Richard our job is to play our game and continue