jonathan: i am jonathan ferro with 30 minutes dedicate to fix income. this is bloomberg real yield. ♪ brought ona downside payroll, jobs numbers in the u.s. disappoint and weight growth goes nowhere fast. your report 10 year yields pledges to a new 2017 low and the high yield issuance spread just keep grinding tighter. we start with the big issue, the payrolls injecting uncertainty

into the fed's next move. >> it's a bigger number than the market expected. >> this is a weak report. >> since inauguration day, the u six rate is down 1%. we brought back over 200,000 people that were dissatisfied or u.s.employed in the workforce. that to us is a really amazing trait. -- trend. >> this is only fueling that fire a little bit so to speak. nowation is one side of it, you potentially have labor market disappointing. it's not surprising that folks are starting to question whether the fed can go twice more this year but three more times next year. >> the chair believes in job growth more than anything else. it's lower than the market expected, but she is going in june. still on the table. september probably off the table at this stage.

jonathan: with bring our guest here what a lineup weave to you. bob michael, cio of global rgan. portfolioffey, manager at eaton vance management, and mike collins, senior investment officer. great to have you on the desk with me this week. i just want to start here, the big chart. yields, spreads, and occurred that is flat. at, the otherook is 150, that's a to 10 spread. flat, flat, flat. i don't buy the inflation story anymore. what is it screaming to you? guest: the market is coming around to the view we have had. it's going to push the front end up. the long and is pricing in the slower growth. i think that is coming through in the treasury curve. i would argue there is more room to run in past cycles, i have

charts of 230 spreads going back decades and typically, that gets to zero. typically when the fed is done hiking, let's say they get to 2% this cycle, you see yield around that level across the whole kurt. we will see if that plays out. jonathan: do you think we can go or get flat? guest: if they keep tightening and insist on hitting the 3%. they have, that's too much hiking. jonathan: kathy? guest: i think they are rising in weakness, but there is good demand out there in the economy. i think it's a misread, i think the weakness is shguest: it's mn expectation on the fed. there isn't so much money out there, central banks outside the u.s. are still printing money. there is $2 trillion a year that is printed and coming into the bond market. that is what's keeping yields down. jonathan: let's talk about how

difficult it is an 2017 to be a bond error. guest: it's been tough. if you look at a couple things, central banks have been more hawkish than anyone anticipated. you have the fed talking about taking down its balance sheet before the end of the year and he committed to more increases in the fed funds rate than people anticipated. ucb is talking about tapering its balance sheet. corporate earnings look great. recession is gone, they look strong. i think there is a lot of good going on in the market, term premium in the bond market is wrong. i agree with kathleen, but i accept there is a mountain of cash out there being printed every month and is hunting for high yield. jonathan: is this a message to the fed? guest: the beginning of the year with the trump trade, markets were placing of funds rate for about two and three quarters.

that's something we look at. long-term investors today come up with this rally, markets are pricing at one and three quarters funds rate. that's much closer to what's probably to be realized, closer to fair value. bowl, i think you are supposed to fate this rally a little bit because a lot of those lower rate hike expectations are being priced into the market. jonathan: kathleen, the want to weigh in? guest: the challenge is, we need to take a pause here, but when what rates are pricing in at over the next two years, it's only two and a half hikes. that's not enough for the strength of the economy. with bob, it's tough to be a bond bear, but the risk is, with rates low, there is a lot of downside being left on the table. guest: don't listen to me, listen to lowell brainard in her address on tuesday, laid out up for size path for tightening.

when i look at bloomberg financial conditions, which i have pulled out, it shows that since the fed has raised rates three times, financial conditions have actually eased quite a bit. this suggests they are falling behind. they stopped raising rates, they stopped qe because financial conditions have tightened. now that they are going the other way, -- it is not tightening. it's just less accommodating. guest: that's true. they have miles to go. if i was the fed, go to every other meeting until there is 2%. jonathan: if you look at financial conditions and he said the signal is there are not going quick enough, but then you say the signal is maybe they are going to fast. which one is it? guest: we are still short the front end. they still have this 3%. they look like they are adamant to hike rates.

even brainard and some of these other dovish numbers look like they are getting cold feet. inflation is rolling over, didn't you look at city surprise, that's rolling over heart. guest: at what point do they get cold feet? not with a $4.5 trillion balance sheet. they be a year from now. we should all hope they get a fund rate to 1.5 to 2%. jonathan: kathleen? guest: my question is, what are they tightening for? it seems to be for the labor market. but nobody is talking about is inflation. they don't think it exists and yet, every day that goes by, we get more and more risk of inflation eating up. guest: they are trying to normalize, right? surely a minus one and two -1.5 is nowhere near neutral. looks somewhere that normal or at least neutral, then you see what happens. she also talked about the term

premium and said it's the foreign money that goes into the u.s. market. jonathan: let's talk about global reflation. the last time we had this face-off between the bull and the bear, you brought up chinese ppi. as the reflation story, it's not just reflation in the u.s., in china we started to roll over a bit. does that make it difficult to remain a treasury bear when the data in china for 2017 seems to have peaked? guest: it doesn't make it more difficult to be a treasury bear, i still think it's stupid to buy treasury bonds at this level when everything in this central bank tells you it's going to withdraw accommodation. we are just debating the speed of it. that's a secular change. china has done a great job. i will take the other side of that. they have a complex array of problems to deal with. they've done well. they've toppled the banking

system, tackled their infrastructure, targeting a reasonable level of growth, not .omething about 10% or 8%, 6.5% t's at'good level for them to be at. jonathan: i'm going to ask the 152?ion, whose dirty as are you confident that will less to the end of the year? guest: absolutely. everything the fed is telling us, the end of the year they will begin balance sheet reduction, and a support of the long end market is something we will deal with. , whenaditional metrics the fed raises rates, the curves flatten. inhave never had to build come up what happens when they run down there balance sheet and controlled the long end of the curve? we will have to adjust to that. guest: i agree with that. this will not be a normal cycle. the have had the one tool,

funds rate. now they have to, the balance sheet. i don't think you will see the curve get flat like in past cycles. guest: my only concern is that the supply of the long and is shrinking. actually, i don't think there is going to be as much havoc in the market because there is less that the treasury -- runoff.t depends on the in 2018 and 2019, they have $20 billion in treasuries that mature. having something that's transparent and steps up the kind of things that they laid out if the gets to say, i don't know, 10-20,000,000,000 dollars per month, we can absorb that. i think it still leads to a steeper curve. jonathan: quick final question for you michael collins. the numbers on the screen today, do you have the opportunity to sell down? off this have sold quarter.

maybe they don't hit one and three quarters, but it's much closer to fair value in our lives. jonathan: guys, you are sticking with me. coming up next on the program, it's the block issues in height yield. dress up spread. ground a little tighter. you are watching bloomberg real yield. ♪

♪ jonathan: from new york, this is bloomberg real yield. i'd like to head to the auction block where the calendar. her from may to june this weekend. it was a slow day for high yield issuance. the slowest is since 2012 with

pricing falls as low as april 2009. the spread between high-yield wants and treasury is expected to lower further. the spread is currently about 360 basis points according to index data. the investor search for yield, sold for 1.25 bonds. for managed to secure bonds one billion, i want to bring back in the roundtable, bob michael, kathleen gaffney, and mike collins. kathleen, let's use this offering from the conversation. about how difficult it is to get adequately compensated for the risk you assume no matter where you look at -- where you look. guest: you are not adequately compensated no matter where you look. it's tough in high yield. jonathan: let's use car rental

companies as an example, michael. they have a capacity issue. a lot of people are looking at their company as problems. there is problems in these companies that have debt. what is your thought on what happened there? certainly these cracks we are seeing on the credit side. auto companies themselves have finance arms, we are seeing auto sales and auto production roll over, you are seeing problems in auto rentals. retail, lodging sector is being hit by technological change and potential exit supply, fundamental cracks. then you have evaluation problem. i third of the ball -- bonds are under spread. guest: i think everybody is being greedy on the high yield market. the spread of 360 races points with the fault rate coming down,

we have the accident in energy. the fault rates only got 24%. ofare headed to 1% i the end the year. 360 basis points compensate you. i would like to buy height yield at 8-10%, but i can't. if i don't buy it, somebody else is going to buy it it. as long as default don't go up i'm ok. defaults?what about guest: there were no purchases of autos in two dozen 7, 2 dozen 8, 2009. sated.t up demand got you had that buildup in the extension of credit, and you are seeing in the subprime market, some delete currencies and losses start to go up as a normal curve would. but in that market, a lot of credit markets, you can it at the spread would like to buy it

at, but you are getting credit. jonathan: the fundamentals are rough. you take the autos and the chart you pull up and look at inventories for every car sold, outside of recessionary. are like the 1980's. guest: why buy a car? i think i will go another 110,000 miles. there is no need. there is less demand because of technology for cars. it doesn't mean there is weak demand in the economy. jonathan: let's talk about demand in the debt market. are you concerned about credit worthiness? when you go for that kind of tension? guest: i am concerned about the health of the auto companies. they represent or value right now. i would say away. but that doesn't mean you can't find good opportunities in

credit or high yield if you broaden your horizons. e.m. corporate is a good example of getting away. jonathan: mike? thet: the average spread on height yield market is misleading. a lot of the high quality companies, cable companies and health care companies and consumer companies, gaming companies, have a really tight spreads. if you want to get that average yield, you have to do a barbell and take a chance and hopefully you are smart are lucky and add value by looking in the harrier credits. jonathan: a look at individual portfolios, what stood out to me is cash allocation about 50%. it's really high. justify it for me. tost: there is very little buy if you are a value investor looking long-term. i don't want to take rate risk, so i don't own treasuries, credit spreads are too tight, and i worry about the bond matt. and it'sals are good

aiding to be in credit for a long time, but i don't want to be the last one at the party. all year, anyone in any asset class has suffered from valuation fatigue. everybody would like to buy cheaper, valuations have been stretched by a lot of metrics. i will agree. but the money keeps pouring in. we are supposed to blame the fed and central banks in aggregate. maybe they are supposed to step up the reduction of size of their aggregate ounce sheet. maybe the fed starting up isn't enough. until that ends, you will feel the pain. money is being printed, it will be exported to us in the u.s., and we will have to invest it in asset we do have valuation. guest: or reach out more robin. 50% is not high cash position. jonathan: but where are you reaching out? guest: currency ndm corporate. what is going on here in the u.s. is about technology,

globalization, the challenge to get growth going. there is a lot of upside, a lot of growth potential in e.m. and markets are nervous about it because of growth potential. that's a quantum increase in risk and you are predicated about the market being robust. talk about china slowing down and central banks not pulling liquidity. you are talking about the perception of risk. i would argue that e.m. corporate and reform potential in e.m. countries are a much better risk to take than to take the risk with 10 year treasuries. guest: i like local emerging markets. [laughter] jonathan: that's not a confession. guest: i will confess to that. you are right. they are still statistically cheap, specifically from where they were when the taper tantrum started. i like the government wants.

i like more liquidity there and i like that they have a high real yield and it's at the highest development. jonathan: just looking, talk about the buffer that you might have or maybe not at all. no, no sitting at night at all when you look at breakevens. i have a chart here that looks at the u.s. acting, equal rate of duration. if you look at the whites of 2008, we were at 160. it's a nice cushion. today, in the lower right, we are at 42 basis points. if we get an increase in interest rate, we are wiping out that total return potential. that's where i get nervous about staying to late in credit. jonathan: stay with us. let's get a market check on where bonds have been this week. yields grinding lower on two

basis points. tents on 30, 2 .81%, it's a flatter curve no matter where you look at the treasury market. still ahead, the final spread, the ecb decision and it eat cake headed to the polls. this is bloomberg real yield. ♪

♪ i'm jonathan ferro, this is bloomberg real yield. it's time for the final spread coming up over the next week, rate decisions from the european central bank, australia, and india. then the big event in the u k, the election. june 8, busy. i believe the former fbi director mr. comey testified on the same day as well. that will wrap up of you thoughts and a look ahead to next week. might come up looking ahead at the ecb next week, what are you

looking for? guest: they will start talking about tapering the purchases of the bonds. they have the years ahead of them and they are talking about reducing the size of the balance sheet. and reducing amount of purchases. if you look at the data out of europe, we had week numbers today, portugal, spain, ireland, italy posted better numbers than expected. jonathan: kathleen? guest: i completely agree. europe will become the focus. there is a coalescent going on right now, a lot of youthfulness humming out of europe, and you have youthful -- you have inflation there as well. jonathan: one question, one word answers to each of you. first question, do we hit 2% on a 10 year yield before he hit 2.5%? guest: 2.5% guest: 2%. guest: i wish it was 2%. jonathan: high-yield or cash?

guest: high-yield. guest: cash. guest: high-yield. jonathan: are you long euro or long sterling? guest: sterling guest: euro. guest: i will take the other side and go with sterling. jonathan: great to have you on the program. that does it form new york, we will see you next friday with special coverage of the u.k. election and the ecb decision. the reaction will take place next friday, 5:00 p.m. london. this is bloomberg real yield. ♪

♪ david: did you feel that there was a glass ceiling? kenneth: there were people that said to me, i do not think a black person could ever be ceo. david: september 11, tragedy occurred not very far from here. kenneth: i said i cared a great deal about them and their families. david: somebody bought a $175 million work of art. was that to get points? do you ever leave home without your american express card? kenneth: i never leave home without it. when i am at home, it is always with me. >> would you fix your tie, please? david: people would not recognize me if my tie was fixed. let's leave it this way.