It is stronger than we expected. We felt for a while that the pot of core inflation is going to move to a higher trajectory in the next couple of months. If think there is a chance of inflation in the economy any see strong Growth Numbers coming out, that is going to bring volatility back to a more normal environment. The 10 year near 3 makes sense. That price is in four hikes, a lot better than six months ago. When we get a big selloff in equities, it will be because of a selloff in bonds. Bonds will lead equities down the next time. We have not yet seen it, but the idea that bonds will be a safe haven, i dont really get. The likely selloff in equities will come because bonds have to reprice because we have inflation. Jonathan joining me around the table in new york is jeffrey rosenberg, chief income strategist at blackrock, kathleen is from eden park management, and from london, nick, from jpmorgan asset management. Its great to have you on the program. The idea that bonds have no longer given Risk Mitigation quality, equities turn a lower, bonds still turn no one agrees go up. Im wondering what you want to have the allocation to fixed income in that balanced portfolio. In the last clip, it is an interesting perspective. But it is only one perspective, but an important perspective. Jonathan well, give me yours. How does the cycle end . That is the big picture question. There are two ways, a Business Cycle and the credit cycle ends. Either the economy overheats, the fed reacts to the overheating, and that is the scenario that that earlier clip is talking about, equities follow bonds lower. Thats the scenario you get it inflation is overheating. But there is another way, a more recent and familiar way as to how cycles end. They and because of some kind of financial shock. If there is a shock, it delivers a growth shock. Then bonds dont necessarily lead equities downed, equities and risky assets lead. Bonds can be a very effective hedge in that environment. Jonathan what is your base case for why you would have the allocation . The base case is you dont know. You have to build a portfolio that is resilient to lots of different environments. The issue is basically, if you are building a portfolio that is resilient to a downward shock, to a recessionary outcome, and what you get first is inflationary concerns will you get that, there is a price to pay, a cost to owning that Downside Risk protection in bonds. Jonathan kathleen, your thoughts . Kathleen i think what we might see is a shock, but i think the inflation issue is a bigger problem for the fixed income markets right now. Jonathan moving away from the climate of low inflation, after weather reports of wage growth on the upside and cpi on the upside. Are we witnessing a real shift . Kathleen we are differently seeing a shift here. I would say the slack in the economy is quickly disappearing if theres any there, and the market has not priced that in yet. What we are seeing now is an adjustment, but if the data keeps coming through, there are going to be more and more adjustments for the market to reckon with. Jonathan nick, i want to bring you into the conversation. Nick when you think of inflation, absolutely biased to the upside, the bit you are missing is the international dimension. It is not just u. S. Inflation going up. Take a look at europe. In the most recent wage a deal there from german unions was 3. 5 to 4 wage growth in german inflation. Some have negotiated a 28 hour week. If that is not inflation, i dont know what is. Jonathan jeff, it raises the question, whether you get a treasury that sounds off in a vacuum or this becomes a global bond market downturn. Is it the latter or the former . Jeffrey it is absolutely global. None of us look at treasuries in isolation. Particularly the last couple of years, the narrative has been on global flows and their influence on Interest Rates. Global qe. It is a codetermined relationship where you have all of the factors. We take a lot of focus in the u. S. With the marginal data, what the fed says, and the dollar is preeminent in its role in Financial Markets and the role of the fed, but Global Factors absolutely matter. It is a reflationary environment, not just from the u. S. Perspective. The u. S. Is in the lead, but it is also being influenced by Global Growth and inflation expectations. Jonathan the global flow story, from one area of bond markets to another, we have been told again and again, when you bake in the fx hedging costs, the story changes radically. Does 290 do it . Doesnt get the capital to finance it . Nick i think it does. But they dont just focus on treasuries. When you look at the Investment Grade index in the u. S. , you are 375 or Something Like that, so that is a big pickup in terms of yield and credit spread if you are coming out of europe or japan. Remember, globally they are still printing money until the end of the year. Jonathan kathleen, your thoughts . Kathleen i think you watch nearterm movements, that you will get more inflation data coming out of other areas in the world and europe. But the Bigger Picture i think is a story that was drawing money into the dollar was it was just the u. S. Alone. Growth everywhere i think caps the potential for money to keep coming in. The 10year did hit 295 and came back. There are going to be levels that will be tested. The Bigger Picture is, rates will rise and the influence on currencies, your point about hedging is a good one. Jonathan jeff, you have done a lot of work on this. It is about how you balance a way from dollardenominated assets. I have heard arguments as to why loose fiscal actually ends up with a weaker currency and one of the arguments is, forget the insurance debate about loose fiscal, strong monetary policy, the argument now is the fx channel needs to adjust radically to attract foreign capital back into the United States. You put it the other way around, foreign capital fleeing the United States leading to a weaker dollar. Jeffrey this is a note we put out about recalibration and repatriation. The tax deal is a nonissue. Those moneys are in dollars. The repatriation that is happening is you have to look at the data. And what most people, ourselves included, have been talking about for a long time is Interest Rate differentials drives inflows into the u. S. Since the second half of the year, if you look at the data carefully, look at the information, it has flipped on its head and is the opposite. What is that telling you . You talked about hedging costs, that argument is over with. If you take hedging costs, the u. S. Is no longer attracting the worlds flows. It is the unhedged flows we are talking about that have currency impact. The u. S. Has been the beneficiary of the carry trade. You are only willing to bear the risks of an unhedged dollar position in carry trade if you are comfortable with the currency. As soon as you lose the confidence of the currency, the carry goes away dramatically because fx returns are in bigger component of that. If you see the dollar lose the international attractiveness, because International Returns start to look attractive, home alternatives start to look better and the flows can turn. I think that is what is happening and the dollar is declining and concerns driving up Interest Rate differentials. Jonathan hypothetical treasury, lets pretend, an anonymous country has a treasury secretary building up a budget deficit, how big of a mistake is it to talk down the currency by this treasury secretary . Jeffrey [laughter] it can be an issue, but the problem is the u. S. Has great reservoirs of benefits that shortterm discussion may not be able to fully drain. How about that . Jonathan you handled that very well. Nick, lets bring it into the conversation. Take me into the book a little bit at jpmorgan asset management. How are you guys thinking about it . What are you doing . Nick what is mispriced is the ecb. When you look at policy setting in europe, it is at absurd levels. It is that emergency levels, and you are clearly not in an emergency. So the risk is that we see that ecb raise rates and that will have a dramatic impact on the currency and will lead further to a weakening of the dollar. By yearend, 135 is not unreasonable for the eurodollar exchange rate. Jonathan are you advising moving away from dollar rated assets . Nick we like the dollar assets in places like high yields, but critically we want that currency hedged. Jonathan nick, kathleen and jeff, sticking with me. Coming up on the program on real yield, the auction block. That is coming up next. This is real yield. Jonathan im a jonathan ferro, this is real yield. I want to hit the auction block, highgrade u. S. Issuers of all places. Wednesday, there was a session with zero issuance in a session. Later in the week, three of 10, 30 and 15 years. 7 billion of 30 year temps were sold. It covers 2. 31, which is less demand than a previous sale and a sign that investor appetite for risky sovereign paper. Egypt raising from international investors, receiving 12 billion in orders. Still with me, jeff, kathleen, and nick. Kathleen, i want to get your thoughts on credit. A lot of people looking at the fund flows and money draining out over the last week or so. Kathleen we had some big headlines. Jonathan are you seeing cracks in the fundamentals . Kathleen what is interesting is that the fundamentals are solid, it is the technicals we have to be concerned about. The technicals drove us to the yields and spreads we are seeing. So yes, you are seeing some flows, i think you are seeing a big move of investors taking some duration off the table. Im not sure that is the best idea at this moment. The front end of the curve looks like a more exciting place to keep an eye on. And that is not something we have done for 30 years or so. I think that is where the action is taking place. Jonathan jeff . Jeffrey we had a wakeup call on volatility and illiquidity, you saw it hit the cdx market in the liquid parts, where i think they are liquid, and then it spread over to the cash markets late in the week. Spreads certainly widened. It has nothing to do with fundamentals. Nothing changed overnight with regards to corporate fundamentals. Something changed in the Broader Market narrative and the outlook for Interest Rates in the short end of the curve that changes valuations. This movement of rates and spreads is interesting because that is about relative of value, and can you continue to press down spreads in an environment where very safe alternatives on the front end. 2 on the twoyear is a big deal and you have now restored safe alternative yields so reach for yield trade has to be repriced. Jonathan that is a good point as well and raises the interesting shift we have seen over the last 12 months. If the opportunity of cash products versus investmentgrade and versus treasuries, and that has shifted in the last few months, never mind the last year. How has that shifted for you, nick . How are you thinking about that . Nick you are right. When you look at it, cash is really competitive, lets be frank about that. But the reality is when you look at the repricing we have seen in credit, you can look at it in a total yield perspective. You have the u. S. Index as a total yield, it is not bad. But before we get to highyield when you see 6. 5 as a total yield. On a relative basis, that looks attractive, particularly given the fundamentals. Again, let us be frank about the fundamentals. Corporate america has never been in better shape. Jonathan it raises the question, if Corporate America is doing so well, it has basically collapsed over the past year. Why . Jeffrey e. M. Is doing well, too. Look at the improvement of the fundamentals. Look at the credit fundamentals. E. M. Has a history of risks, but they deal with their risks and washed out the debt. Argentina is a great example. The gdp of argentina is a lot lower than the u. S. So yes, it has had some over time persistent problems, but where it stands today is a much better position. And that stands for emerging markets. Kathleen i think it is an important time for investors to Pay Attention because you see the spreads on top of each other, but go back to the fundamentals, because where are there better fundamentals . When i hear fiscal looseness, that is bad for the u. S. If they are on top, i want to go with the asset class where there are better fundamentals. I think that is e. M. I would buy the dip here. Jonathan lets talk about credit over in europe, i am talking about sovereign credit. Many people are looking at italy and spain as if they are credits. We had a viewer sent a question on the bloomberg terminal, try to understand why the spread is not widening here. Why isnt it . Jeffrey you have a lot of distortion in the european fixed markets because of the role of the ecb, and quantitative easing and the persistence of quantitative easing going back to doing whatever it takes. We havent had a real credit market in europe ever since that time period. This is financial repression. Financial repression is an explicit policy to hold everything together so you buy time to let the fiscal and political side work itself out. So the bond market signals are not real price signals. Jonathan nick, you are in london. You are closer to the heart of all of this then we are. The spread between bunds and bdp. We talked about where the spread would be after an italian election. We have a very different view of things. Why are we so much more comfortable . Nick when you look at levels of support for the euro in a country like italy, it is higher and increasing. One reason is italy itself has healed very much in terms of the economic profile. We all know the result of the italian election. When you look at italys political dislocation, frankly it is nothing new. Away from that, italy is a very wellrun country with a modest budget deficit. So when you look at the spread versus bund, it goes a lot tighter, and our target for that is 80 basis points. All that does, it sounds aggressive, but all that does is put the spread back to 2015 levels. Its better shape. Jonathan are you much more comfortable looking at the situation in europe, instead of Corporate Credit risks, do you much prefer to take the risk with the periphery with the likes of italy . Nick absolutely, you take the periphery risk and highyield risk in europe. Jonathan thank you, you are all sticking with us. I want to get you a market check in with treasuries have been this week. Twos, tens and 30s. On the front end, we retrace some of movement of the previous week. Yields are back up 12 basis points, relatively unmoved. 30 years is down by four to 3. 12 . Still ahead, it is the final spread on this program and the week ahead. Featuring minutes from the fed, the powell era begins in the central bank. This is real yield. Jonathan this is bloomberg real yield. It is time now for final spread. In the next week, monday is president s day in the u. S. , stock and bond markets are closed, european prime ministers will vote for the ecbs next vice president. We will also get minutes from the fed and bank of england. Governor mark carney will be addressing parliament committee. Still with me, jeff, kathleen and nick. About the amount of issuance coming from the treasury, specifically tbills into next week. Kathleen, will feel be the insatiable demand for treasury needs as they ramp up issuance in the coming months . Kathleen i doubt that very much. Looking at the short end is going to be important. You have supply from the treasury. You also have companies that are now incented to use their cash. They are already in dollar investments, but they are in short duration investments. When holdings start getting sold, those yields will be a lot higher. I think it means the short end is going to be where the attention should be. Jonathan jeff rosenberg, your thoughts . Jeffrey i agree with kathleen, the short corporate trade and theme is a big one, the impact in terms of repatriation. In terms of the issuance and your broader question, we are going to have this theme for a while, a lot of issuance to come. It is not so much the demand, but the demand at what price . Where will the price be, where will the issuance end up . Everyone is focused on the front end of the curve. It is going to have to move out. Jonathan i want to run through the rapidfire round. First question, will treasuries offer the safety you need if you get a downdraft in equities . Jeffrey absolutely. Kathleen no safe haven in treasuries, look at e. M. Nick absolutely, safe haven. Jonathan u. S. Yield or emerging market highyield . E. M. Or u. S. . Kathleen e. M. Jeffrey em. Nick u. S. Jonathan janet yellen is gone, we have powell in the hot seat. Kuroda gets another term. I wonder what happens to the ecb. Will we get draghi 2. 0 . Kathleen no. Nick no. Jeffrey yen is vibrant. Jonathan there you go. Jeff, kathleen and nick, great to have you with me. We will be here the same time next week. This was real yield, this is bloomberg tv. Scarlet im scarlet fu. This is etf iq. Where we focus on the assets, risks, and rewards of Exchange Traded funds. Scarlet are we on the cusp of seeing the whites of inflation s eyes . How it is causing a shift in portfolios. Ibms watson is now stoc