jon: from new york city, i'm jonathan ferro. this is "bloomberg real yield." coming up, congress and a government shutdown, passing a spending bill worth over $300 billion. will forceg deficit u.s. to borrow $1 trillion this year. finally showsket a few signs of catching up with credit. volatility making a comeback. >> the market is finally catching up with fed expectations.

the labor market is starting to take hold with wages and employment. i think the market is waking up to the fact that the plan that the fed put in place is actually justified. >> we have more policy uncertainty which can naturally lead to more economic uncertainty which will lead to more market uncertainty and that will end up with more volatility. >> these things take time. it's hard to have such a dislocating move without creating all kinds of wreckage around that you are not expecting. >> lower long-term yield, that could lead into higher evaluation. i don't see a financial crisis on the horizon. we are paying close attention to it. qe unwind more getting priced in. the boj was buying. while that is unwinding, the entire market is realizing that , that is stepping

away. jon: get ready for more volatility. around the table, greg peters of pgim fixed income, bonnie wongtrakool from western asset ofagement and rob waldner invesco fixed income. is the volatility going to spread across assets? for the moment, it is contained. does it get across credit? greg: i think so. the volatility regime is shifting. it is being led by the equity market, for sure. it's going across different markets. bonnie: i think the bigger question is should there be volatility. you have to look at what are the causes of this. because of market sentiment and positioning or because of fundamentals? you have to acknowledge that market sentiment positioning can have a big

impact on the market. that's what we are seeing. equities going in a straight line. we see fairly big moves. on the other hand, you have the fundamentals. is there a big change the fundamental picture? we don't think so. if you look at the economic front metals. jon: what should there be a noferent regime if there's fundamental shift? inflation is low and the output numbers are stable. can you have a volatility shipped if the fundamentals aren't going to change? bonnie: you can have volatility shipped because of sentiment positioning. people are trying to figure out their view on inflation. fundamentals, the like i said, our view is that inflation overall is still going to be limited by structural factors. the friday print is still within

the range of what we've seen for the past several years. the fed wants to see wage inflation between 3% and 4%. we are not there yet. they would like to see consistency in that range and we are not there yet. a clear sign that inflation is going to rise. jon: a big debate in new york, whether we are seeing signs of a regime shift. do you see signs of that? we would completely agree that the fundamentals deeply haven't shifted around growth. the key thing that shifted in the last month is worries about inflation. we recently did a survey of global investors and we found almost none of them were worried about inflationary risk. juste other hand, we've added fiscal stimulus in terms andax cuts and spending investors are waking up to the fact that maybe there is inflation risk.

the issue is that they were so complacent before, now, we see breakevens rise and yields rising. we think there's an inflation rather than market a fed driven or financial conditions driven market. jon: it was a tale risk for a lot of people. they said it was inflation. re: shifting to a world where it's the base case? greg: i think there's a little too much price than in terms of inflation. honestly.what heroic, you are starting to see a tightness in the labor market, but you are not seeing meaningful wage gains. the report last week was tainted issues thather showed the wage gains moving higher than it ordinarily should because of lower wage workers

not showing up because they couldn't get the work. where we are getting to from a market standpoint, you are really pricing in inflation coming. i'm not convinced. jon: shout out to the whole team at pgim. you were the fixed income manager of the year. end, thet the front rate hike is coming, but stay anchored on the long end. you apply that framework coming into 2018? greg: we are still very much the short end. the back and has been tricky. what has changed this year versus last year is the deficit picture. you are seeing a real big move in the deficit. you have a supply story and you have that coming. there's been a big move.

i think we are toward the end of that move, honestly. we thought it was 275. clearly, we are past that. we are getting closer to the top of the range here. jon: what are your thoughts on this? a lot of people thought the buyers would come in. we had auctions of tens and 30's this year. the yields are materially higher than past years. it didn't come through for the 30 year. is this a market struggling to price the expirations that will come in a treasury that will spend more? the federal reserve is taking a step back as well. bonnie: it is less about the supply and issuance then inflation. year, weo greg, last also had a plattner on in the treasury yield curve. after that compression in the yield curve, we thought we

needed to buy the curve back because it is fully priced in. the five-year at 2.50 offers a lot of value. the risk is actually that there will be fewer hikes. i want to get your view on something quite important this week. bonds have offered very little to no risk mitigation. marketld you the equity would be down as much as it is and then told you bonds would hover around 2.85 on a 10 year, some people may not believe me. there's one real good reason. it's all inflation expectation driven. when inflation impacts markets, it has different behaviors and financial conditions related move. in financial conditions, when equities go down, bonds rally

and you get that diversification. if you get the market driven by inflation on its own, it doesn't have the positive impact for bonds and it is neutral to negative for equities. that is exactly the market you've gotten in the last couple of weeks. we are not surprised by it at all. this move from complacency inflation to awareness inflation -- the market is suddenly aware. that is a big change. jon: a lot of people trying to figure out where the central bank put us. federal reserve officials have been very hands-off about this. i sat there wondering why -- we tweeted this out. take a listen to this. in previous market corrections, macro shocks triggered the risk off episodes. andcentral banks came in save the economy by delaying those times by easing. this time, the risk is inflation.

before, they were responding to inflationary risks. now, the market is reacting to higher inflation, the central bank put is not there, is it? greg: the central banks want higher inflation. the war they have been waging is deflation. think the inflation story quite frankly is overblown at this point. we are removing from this regime of deflation to slightly more inflation. i don't see it as a 1970's type of scenario. jon: i remember during this time last year that this was the trade this time last year. why did we get the reflationary enthusiasm? greg: the difference last year versus this year is last year, there was hope. investors were expecting taxes

and other types of things. now, they are actually seeing it. it's a different point in the cycle this year versus last year. that's what the market is reacting to and that's why vol is higher, because of the uncertainty. this year is much more difficult. jon: it seems like easy money. robert, really appreciate your timing. bonnie wongtrakool of western asset management, rob waldner of invesco and greg peters of pgim. greece taking a step towards normalcy. that conversation is next. this is "bloomberg real yield." ♪

jon: i'm jonathan ferro. this is "bloomberg real yield." greece takes another step towards exiting a bailout program in august, selling 3 billion euros of seven-year bonds with the yield of 3.5% inside their initial target of 3.75%. investor orders doubled the sale . in january, bonds were sold by state and companies, the most in 11 years. a series of treasury auctions in , the lowest since november. still with me, greg peters of pgim fixed income and bonnie wongtrakool of western asset management and rob waldner of invesco. ed you the bond market, you would have never

known what was happening in the equity market in europe. why is the rest of the world, why is the bond market holding up this well in europe? rob: it's all about the drivers of this correction. we think it is inflation that is the driver. when inflation is the driver, inflation is good for spain and italy and greece. it is good across most emerging markets. the mexicansing, peso is up 4% year-to-date. there's been virtually no volatility. spain has rallied year-to-date. it's the assets that have the most overpriced valuation having kicked into a correction by this inflation scare. that would be bonds and treasuries, and that has kicked over into the u.s. equity markets. those markets will benefit. greek bonds have done quite

well. bonnie: the eu has to inflate its way out of the debt. the ecb has been buying a lot of credit. even though the program is a lot smaller, they are buying the same amount of credit as they were when they were $8 80 billion. the peripherals are trading like credit. you are seeing that support the spreads as well. jon: ultimately, you need to inflate a way that that. -- the debt. what's more important? the you get that balance between one stepping back and one stepping in? bonnie: we would say the spreads here are not compensating for the risk. we don't think it is a good buy. we still have to get through the italian elections. the valuations are not where you would want to belong. greg: if you look at the short-term, growth is popping.

that would be the term we would use. 2.5% potentially left in one. growth is really permi booming. there's long-term sustainability issues. jon: if growth is popping, you expect a serious reevaluation in terms of the pricing for bonds. what are we going to do? start eating into that spread even more? that spread will get even tighter? rob: eventually, there may be some pressure on these peripheral bonds. eventually, ig has started to write it out. willonds is where this show itself. greg: the front end of the market is clearly mispriced. that is tied to the negative depot rate. i think that is the most sensitive point.

the growth story is an important story for the periphery. it makes sense to me that they can continue to do well as a consequence. in europe, the big surprise has been the strong growth. pops up inowth countries and the spreads should reflect that. jon: two surprises in the market -- the equity market draw down quite aggressively, in the u.s., credit has remained resilient. we have started to see some cracks. greg: it is a price discovery issue. you look at the derivative market, the pricing is much more volatile because the price discovery is instantaneous. in triple c's, the trade is much more by appointment. you don't know the real value. flows is fund

interesting. you saw outflow in high-yield bank loans and inflows into investment grade credit. there is still a demand for spread and credit and investment grade in particular. jon: from the conversations i can tell from the last year or so, the big bulk of investment managers in the u.s. are de-risked in high-yield. they haven't participated in the massive run-up we've seen elsewhere, more specifically in equities. i know spreads are still really tight. is this a market -- for a lot of de-risked.ey had th greg: it makes sense to take the risk down given where spreads are. the risk return is not in your favor. you have to pick and choose your spots. is there pockets of value? absolutely.

the one area that has value, in our view, are the triple c's. y cost ofopportunit being in cash -- most people saying they will keep on clipping anyway. if they have the drive out of that now, is now the time to work? bonnie: at western, we did de-risk in high-yield. it depends on what's going on in the equity markets because they are correlated. 30% of high-yield is retail. that has doubled since 2005. you can't just say they will operate independently. for us, we would like to see more stability in the equity market and rate market. but stille wider, closer to 300 than not. jon: bonnie wongtrakool from western asset management and

yorkpeters of pgim in new and rob waldner of invesco. yields at the front end, aggressively lower by 11 basis points. we start to think about the potential for rate hikes in the near future. 30 year yields grinding up by two basis points. spread.ead, the final it read on retail and inflation. that is next. this is "bloomberg real yield." ♪

jon: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. president donald trump expected to release his version of an infrastructure plan. we have global economic data coming up all week, including

u.s. cpi and retail sales and global gdp. there will be chinese new year celebrations later in the week that will affect the asian market schedule as well. we have bonnie wongtrakool of western asset management, greg peters of pgim and rob waldner of invesco. i'm thinking of the asymmetric risk. friday wasn't primed for an inflation surprised. is this a market that is better primed for inflation surprise? rob: i think it has started. this has been a multiyear process of getting used to the fact that there was little inflation risk. now, we are going through a period of getting that back on the radar screen. we don't -- we think the risk of a near-term cpi pump up -- bump up is fairly low. it's hard to see where that will come from. it's less about the cbi print as cpi print -- it is less about

the cpi print itself. we've started pricing this in. greg: i think the data is ultimately going to calm down the market. if the data comes out in line still at or below that 2% level, that will settle down the market and the fears will be alleviated somewhat. jon: i will get you guys into the boxes and wrap up the final part of this program with a quick fire question. 10 the pain remain contained? greg: no. bonnie: no. rob: yes. jon: can treasuries act as a hedge against stocks? greg: yes. bonnie: yes. rob: only if we get a financial conditions event. jon: we've had the greenspan put and bernanke put -- i'm trying to figure out where the chairman powell put exists. greg: yes.

bonnie: yesterday rob. rob: no. jon: great to have you on the program as we wrap up a volatile week. a very resilient week for global credit. , bonnieers of pgim wongtrakool of western asset management, and rob waldner of invesco. this is "bloomberg real yield." this is bloomberg tv. ♪

>> it is 1:00 in washington, 6:00 in london, and 2:00 in hong kong. julie: welcome to "bloomberg markets: balance of power." focusing on the intersection of

politics and the economy. market turbulence. u.s. stocks selling off on a day of swinging between gains and losses. investors live tour the weekend to catch their breath. washington gets its act together. republicans and democrats get enough consensus for a budget deal but at a cost of $300 billion in annual deficits. and republicans used to compare -- complain about obama deficits, and now rand paul wonders now if they are only conservatives when they are not in power? julie: breaking news, stocks lower yet again, although off the lows of the session, still setting up for the worst week for the s&p since 2011 or 2008. abigail doolittle is following it.