jonathan ferro with 30 minutes -- jonathan: for our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to income. this is bloomberg "real yield." ♪ jonathan: coming up, payrolls deliver downside. treasury yields produce new lows for 2017. political risk? what risk? the reach for yield continues to drive big demand, and clouds over auto debt grow darker. why this is not the subprime crisis. why investors say it's different this time. we start with a big issue.

why the big downside for payrolls may not be as bad as it looks. >> it is a weak report. >> it was a miss on job creation, but be careful. if you look at the three-month average, we are probably going to settle at around 150,000 eventually, and wage growth was unexpected. >> we're pretty pleased with what is going on in the unemployment picture. put on top of that what we know is coming with all the jobs created by everyone we talked to in moving manufacturing back to the u.s., we are excited about what is going on. >> i am pretty encouraged. this does not change the fed trajectory. >> i want to bring in our round table, a full house in new york city. rich clarida, pimco and the head , of u.s. multisector fixed

income. great to have you on the program. should we forget the payrolls report ever happened? >> i think there is some noise here, probably some weather, but we have to get used to a world where payrolls will probably have a one handle, not a two handle, and this is part of that process. jonathan: we heard that last year. what's different? >> i think we should always forget the payroll number. i think it's one of the problems of the market today, way too short-term to focus on long-term views, long-term valuations. >> despite the rate hikes, despite the payrolls report, you have to see the optimistic side of things today. >> what's the story on treasury lows? >> it is a reminder that it's a powerful tool in your portfolio. don't count out. we talked about the rising rate environment for two years where rates were basically unchanged or lower.

>> do you still fade the reflation trade? >> perhaps near-term, but longer term, i would not bet against hitting 2% inflation. it's an opportunity if you have a longer time horizon then next week. >> definitely a longer time horizon then next week. i think it is the wonderfully attention to because if you look at the inflation market, they are not concerned about the trump reflation trade. they do not seem to be concerned, so you have the equity guys, who keep looking for excuses to go higher. the bond market thinking maybe it's not as good as you think. >> how do we get federal reserve hikes, but financial conditions ease? >> i think it is a nice reminder that the world out there needs yield. they need return, and they are having a tough time finding it. you see that across every asset class, if it's equities or fixed income.

>> forget the big downside to price. the federal reserve, they talk about normalizing the balance sheet. why? >> that was a bit interesting. we got more interesting than just we get more information than we thought we would, but there is more for the fed to do on the balance sheet. we do not know the destination. we do not know if it will be tapering or cold turkey. perhaps a got swamped by the geopolitical events yesterday. jonathan: look at how lumpy the maturity profile is. the book of the debt that rolls off -- it is seven, tens, stuff they brought a long time ago. how do you manage the rolloff of that passively? >> if they want to be passive, they won't be printable and if they want to be critical, they will not be passive. if you have a chart that shows the mortgage rolloff, we do not know.

i think that is a challenge for the fed, and, quite frankly, the fact that we dnot know more sitting here 809 years after the beginning i think is pretty ridiculous. >> are you surprised by how calm things have been? >> i think one of the challenges about what they are going to do, the longer they delay the taper, the longer those holdings get into maturity. they keep reinvesting in mortgages and treasuries. you are baking up a bigger problem and qe is restoring the market, which i think is the biggest factor. >> you have to put this in the context of bank lending as well. you look outside the u.s., i think europe and european tapering would be a bigger deal in some sense because it might

be a bigger surprise. japanese change of policy would be a much bigger deal, given what expectations are. >> of bias in this market is that the federal reserve normalizes the balance sheet, they will pull back on rate hikes. at the moment, that is all that matters to me. do you buy that? >> i think that's a good point and bill deadly deserves credit for it. they should put upward pressure on the balance sheet. deadly -- dudley acknowledge that. john williams said more or less the same thing of frankfurt this week as well. that's another wildcard, the slope of the curve depending on the balance sheet. >> the federal reserve comes out. i assume you do not usually care much about 18, 19 in a significant way, but did 2018 just come even more ridiculous now to pay attention to? >> i think broadly, yeah. it's what they do with the

taper. let's say they taper $10 billion. our research suggests that us with 15 or 20 basis points, and maybe that's the part of the curve they want to impact more. they can hit 10 years, reduce some of that negative term premium. maybe that's not a that play, and it gives them more firepower is things roll over. >> what's the trade? >> first of all, i think we have to define the "day" because it is going to change pretty materially -- the "they" because it is going to change pretty materially. you have to watch the statements of the curve. the curve continues to flatten the way it has been, i think you will see this. i do not think that is the base case, but it is something we are watching. >> policy continuity, is that something we are taking for granted? >> we should not take it for granted.

we have had transitions before and even when they turn out to be successful, they are always a bit rocky. potentially all of the seats on the board or five for sure could turnover in the next year. i think markets are too relaxed. >> is a change in the following sense that they come from a professional background and not academia, or is it actual change that is shift from a dovish to hawkish the lindsay -- fomc? >> i do think academia versus non-academia is that important. i think communication is job number 148 a chair, so whoever president trump nominates better have a clear way of communicating policy. >> sealed's are going to go hier, theyo not. is that going to continue? >> i think with the weight of money chasing fixed income assets, it will be a problem for things to move materially

higher. we have friends in europe where you talk about the european political risk. if you look at the spread of italian 10-years versus 10-year treasury, it moved, but relative to where it was in the real european crisis, things over there look very expensive to me. if you are going to get the move, it could come from europe, but qe dominates everything. when we get the signal to taper, that could be the pain trade. >> at this point, you sound very defensive. the question i would ask of you is if the reach for yield is intact in a huge way, in a way that many people said would end a couple of months ago. >> i do think people are still looking for returns, starting to shift towards equities. within fixed income, i think there are plenty of opportunities you can find if you go away from traditional corporate credit asset classes.

you basically need flexibility today because it is not easy out there, so why limit yourself? why constrain yourself to one subset when there are only a handful of opportunities in each area? >> coming up, we head to the auction block where gm just delivered a record quarter. this is bloomberg "real yield." ♪

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jonathan: i want to head now to the auction block where em just keeps surprising to the upside. $58 billion of benchmark eligible bonds. looking deeper into the numbers, the appetite was strong for financials, the sector even outpacing supply for energy. in south africa, check this out -- even with a downgrade to junk, investors bid more than six times the amount on offer on a government bonds sale this week. i want to get back to the panel. it's like this blanket trade, even with the downgrade, it was by south africa in that auction this week. what is the takeaway? >> the take away is there's nothing else that offers value is a consensus trade, but at least there is a decent entry price. price is important. everywhere else, i would argue be patient. we like e.m., but in the context of a de-risk portfolio.

>> and i fading the reflation trade? what you've seen with breakevens doing this and rolling over, nominal yields doing this and rolling over, and by doing that, or am i just recalibrating what i think will happen with china and saying i want to buy a emerging markets with that? >> i think you are starting with valuations that are white attractive. you have some growth impulse. u.s. is growing. japan is growing. the u.s. looks like it might grow more, so those things are all contributory, but it really starts with valuation. >> i would only add to that i think the china story is big. there's a lot of concern about china, but this is a year when xi jinping wants everything to be nice and boring and stable. e.m. is still very much a commodity story. >> which are a lot of guys talking about go passive, but gm right now in fixed income, i just wonder what is the big

advantage you have in being an active investor. is it time to pick up the pieces and be a little bit more active? >> rules driven investing in fixed income often causes you to do the worst things at the worst time. look at the energy trade last year. just as we have the big downgrade cycle, february and march, those passive investors just as the market turns, and you have seen where that cut off between investment great and high-yield is not quite as distinct as it was. >> is that a story you can >> i also think it is a function of the fact that each of these asset classes has things that are attractive in them and a lot of things you do not want. why would you anchor yourself to some index that was created by a technology company rather than finding the serities that are interesting.

>> get him out of it. come on. >> not to mention the perversity that in a market-weighted index, if you are owning the index, you are owning the countries issuing the most debt. >> look at the popular index in the u.s. the bloomberg barclays. it's 30% mortgages, which is this big elephant in the room that we were just talking about. what does that due to a passive ad investor? it hurts them. >> what's the big strategy for an active investor? >> rom perspective, you are supposed to look at these countries that are seeing inflation go lower. this talk of rising rates, huge opportunity, huge toll return opportunity, and play dislocation. >> i had a colleague say if you do not know the capital of the country and you cannot take it out on a map, do not invest in it. >> we've been talking opportunities for mexico and

brazil, and we then down there. kind of nice. >> do you want to buy into those themes and hedge what could happen on the protectionism side? in terms of mexico, that's when the protectionism rhetoric was a bit worse. we have similar views on mexico and brazil. we think you have seen that transition, the so-called developed world getting more populous. the developing world getting less populous. i would warn in the context of a de-risk portfolio. >> thanks for sticking with us. want to get a check on where bonds have been this week. it has been another rough week for the bond bears as we print yields. new lows for 2017. we're looking ahead to next week. you are watching bloomberg real yield. ♪

♪ jonathan: it's time now for the final spread. it is a shortened week ahead due to the good friday holiday, but still full of activity, including janet yellen, u.s.

secretary of state rex tillerson in moscow, bank earnings, and the new york international auto show. that is not something i usually talk about, but with auto debt of all kinds climbing for at least 30 days well into $23 billion in december, a 14% jump from a year earlier, one to bring back in the roundtable. the story with auto debt -- tell me why this is not subprime. >> votto is this year's energy. it is not quite subprime in that they scale of things is not as big. it's more dispersed. i think there are pockets of value you can find in the subprime auto space. it is certainly something to be concerned about. yet another thing, if its student loans for subprime auto. there are things building and

building and building, which, -- don't get all your chips. >> from my perspective, it does not. it does have impact on the industry, but at the end of the day, this is another indicator that there is not enough yield out there, so when people find something that works, they go and eat it, and it's like a 7-year-old eating ice cream. it enough to get yourself sick, throw up, and then go at it again. >> is that the loan linked to an auto company? how does this work? where will we see this in fact the most? >> you need to look at each individual loan and scrutinize it individually. it's not the kind of trade which is a generic trade. i would defer to my specialized securitized team, but it shows the benefit of having that kind of analysis. you do not want to go in blind like a seven-year-old eating ice cream because you will be sick.

>> it's not going to be great for retail either because these are people that are running out of cash, and that is not a good thing for retail space which does not have a lot of good things going for it. >> student loans, auto debt, at a time when they are trying to boost the economy, what is the potential to do that with that as your overhang? >> we did have a lot of deleveraging in the u.s. four or five years ago. but you're right. i think we are getting to a point in certain sectors with things are getting structured. remember we're talking about a , thursday and -- $30,000 car versus a $400,000 or $500,000 house. i don't think we want to draw to type a correlation. cars are not going to be systemic like housing stock was. >> another example, you have to deal with auto debt. if they do get the bigger wage packet, are they going to spend it?

>> they are going to spend what is left after they paid the student loan. you are seeing people effectively spend future earnings to sustain their existing consumption. you've seen it in the u.k. you've seen savings rates being eaten into to maintain the consumer-led growth, and i think that is one of the longer-term concerns, so's the kind of thing that will chip away over time. i do not think it will be an immediate hit. jonathan: it all comes down to if the bond bears continually underestimate the structural forces that are going to keep yields lower. >> i think that they are underestimating them. they forget about demographics. they forget about technology and the impact it is having on our not only country, but on the world. when those shifts change, it's going to be a big deal. >> remember, it's a global bond market. as you look in europe, rates are negative on a big heart of the yield curve.

the countries where it is not negative, there is potentially redenomination risk. look at the u.s. can the context of a global market with slow growth and all these other things. >> is subprime auto the new subprime housing? >> no. >> no. >> no. >> is now the time to pick up the pieces in south africa? >> don't know. >> yes. >> yes. >> can the fed normalize the balance sheet? >> yes. >> yes. >> yes. >> treasury yields -- higher or lower by the end of the year? >> higher. >> higher. >> higher. jonathan: that is it this week for bloomberg's "real yield." from new york, you are watching bloomberg. ♪

♪ emily: he got his start at microsoft as employee number 30, personally recruited and hired by bill gates. in over three decades, he went from top lieutenant to microsoft's ceo, and is perhaps best known for bringing light to software conferences that will never be seen again. in 2014, steve ballmer left microsoft after a 14 year reign, bringing his trademark energy and enthusiasm from the boardroom to the basketball court with a $2 billion deal to buy the l.a. clippers. joining me today on bloomberg "studio 1.0," steve ballmer.