♪ jonathan: from new york city. i am jonathan ferro. 30 minutes dedicated to fixed income. from new york, this is "bloomberg real yield." jonathan: coming up, payroll top estimates, wage growth disappoints. policy nervousness continues to grow when the bond yields climb. and protectionism dominating the g-20, and emerging-market resilience with a big your about -- big year about performance. we start with the big issue. looking at payrolls, wage growth disappointing. >> we look at the revisions come

-- revisions, job growth, labor force participation, it is a solid report. >> we need more americans back to work. some are opting not to join the labor force and it is important that we make it attractive for them to join the labor force. >> you are talking about another 222,000 jobs, the moving average 194,000 jobs. it is almost inconceivable. >> wages and price pressures will eventually show up, so it is not going to bring the bond yields down very much and it will not calm the fed beyond a short amount of time because if we are really doing 200,000 jobs, i think they are still going to face inflation pressures. >> despite this rather strong jobs report from the standpoint of jobs gained, not necessarily from wages, which is what janet yellen is watching seriously as well, the fed has one more hike left in the year, probably december.

jonathan: joining me around the table is -- amani and robert tipp, head of global bonds. chris, let's start with you. does payroll support change anything at all for the federal reserve? >> not really. the fed was committed to tighten policy anyway and this gives them more support. whether that is the right policy or not, we can certainly talk about, but at the moment they are tightening and doing something either on the balance sheets or on the policy front. jonathan: a guy from new zealand wrote in 1958 about the relationship between unemployment and inflation. the phillips curve came out of that. we all talk about it. where is the wage growth and inflation getting driven lower?

>> that is obviously the big question on everybody's mind. remember a couple things. what we are looking at is a broad synchronicity in terms of a global growth recovery. we will continue to see that and of the headline number today supports it further. and that is perhaps what is driving the broader easing of financial conditions. let's make no mistake, as long as it continues to be the case the fed will continue on the path of normalization. and further, to the question of wages specifically, it is true that we saw a tepid in come through on wage inflation. however, remember that this is a medium number. the census did a study last year where they looked at what has been the wage inflation for fully employed, continued fully employed employees and it is consistently above the rate of inflation, around 3.5% for example. so perhaps what we are catching here are employees entering the workforce, individuals coming in on a part-time basis, younger

individuals and it could be depressing the number somewhat. and of course, there are a lot of questions around productivity, are we capturing all of it, etc. we will eventually see the price pressures and wage inflation as long as financial conditions remain stable though, the fed will remain on their course. jonathan: robert, we have spoken about this again and again, it seems that treasuries -- is that still the story? >> i know it's a funny story, jon, but bonds are winning. rates are of the last year. the fact of the matter is all the discussion about wages, inflation and the fed, those are red herrings. you are supposed to have wage growth and the fact we have not had wage growth is exceptional. i think there is a large shadow, the excess labor and the global competitiveness. it's really keeping inflation below target around the world.

the fed, they are having an argument and this number makes a difference. the argument is, should we run an unemployment rate that is maybe below, or are we risking an explosion in inflation later on? with this number it is no. bring on the jobs and we need to get the ratio much higher. it crashed in the financial crisis. and this has a long way to run. i think there will be a bad spot for bonds. it was the last 12 months. and we are now coming into the second half and rates have been hit with the ecb. jonathan: go ahead. krishna: let me defend robert. the comments really more on inflation rather than robert. he has a 30 year track record he has been right on. you know, effectively, we have been looking for inflation the comeback ever since the financial crisis. nothing, nothing.

therefore, the burden of truth really is on the people who look at the data 15 different ways and conclude that someday, somehow, we will end up with inflation and that is what we should be trying to protect ourselves against. what the world wants more than anything else is a good bond. and i think that is the driver of yields more than anything else. jonathan: oksana? oksana: i think that the whole idea that the inflation argument will keep the fed from doing what they are going to do is not going to prove to be an effective argument. the fed will continue on this path and i think there is a lot of complacency around what the affect the balance sheet will have an the market, because if you look forward a year and the fed is reducing and there are potentially a couple more hikes have been based in india of oil in the 50's and petrodollars are not recycled at the same rate, and now you do not have the amount of global

appetite for a negative yielding bond in europe, right? so i think all those factors will continue to push the bond yields higher irrespective of what that inflation number is. krishna: well, that comes down to the question on whether this is the right policy or not. yes, the fed is going to tighten. and they will tighten irrespective of what the inflation numbers come out to be. and therefore, it is argued for them to potentially make a policy mistake as opposed to it being the right policy. you know, if you think about income inequality, that is the bugaboo these days. for the first time you actually have a potential of the workers compensation going up. and the first sign of that, you try to tamp it down. is that good policy? if you are trying to reduce income inequality, at the first

sign of wage inflation you try to tamp it down -- that is bad policy. they will do it, but it does not make it right policy. jonathan: i guess as bond manager, you have to work out what is the right portfolio, what is it right now? you said bonds are winning. this week they have not. does that change things? robert: the ecb has been running the wrong policy. the negative rates from absolute scored on that system, so it is time to wind down the qe and then bring the rates back to zero will help them balance. in the u.s. they have been behaving as if the 2% inflation target is a ceiling and preemptively tightening policy. we will get a lesson next year. we will get a new fed chief. they may be more of the same of what we have, or maybe somebody

intent on hitting the trump growth agenda. i think the long rates is at or above fair value in the u.s. i think the spread have a ways to go. returns will be good. i think the risk is on the equity side, it is at the bottom of the capital structure and higher risk bonds if you get a hawkish view. jonathan: that's what i found interesting about this week -- the federal reserve worried about risk and high risk tolerance, yet the focus of the market was on the risk-free assets. make sense of that for me. is it the risk with the risk-free asset or where it usually is? oksana: making the risk-free assets more risky for that reason. we have talked about that, the idea to redefine what risk means. when we talk about bonds and return, let's not forget that they are already priced for perfection. you have to have a continued influx of pretty bad news for bonds to continue the

traditional sovereign high quality -- to continue to generate detective returns investors have seen in prior years. at the same time, you have had an environment for example the yen, an area we have talked about in the past, where you see being priced for perfection means. everybody talking about how it is resilient and what did we see over the past couple weeks? we saw it's struggling to hold on as china was posted strong numbers. the central banks in unison said we are turning a little bit more hawkish. jonathan: i do want to get the one thing that will make life difficult for the bulls. that is positioning. if we can bring it up for the long end of the treasury curve, they have been built up in a big way. does that mean this has the kind of run that you need to shake this out? krishna: potentially. that is the issue, from an economic standpoint, defining what the fed is going to do. nothing has materially changed.

what we are talking about, decent global synchronized growth and the fed committed to a particular path. that did not change of the last week and a half for us to give back 20 odd basis points. the bulls got scared and they are heading for the hills. at some point they will get not so scared and they will reload. it may be some few basis points, not 20 or 30 in my mind. jonathan: ok. oksana alongside robert tip. coming up, the auction block where a soft french auction sparks a big reaction. this is bloomberg. ♪

♪ jonathan: from new york city, i

am jonathan ferro. this is "bloomberg real yield." i want to head to auction block now. we are going outside the united states to the southern hemisphere. to australia where a single buyer snatched up government bonds sold on wednesday, the largest ever amount purchased by one bidder in auctions that date back to 1982. meanwhile in europe, a spanish bank selling notes with a 6% coupon close to a record low level for a southern european lender. the debt sale came even as a nervous mood gripped much of the region. those nerves showing up in the headline auction of the week. a drop in and this demand in france, the ratio 1.53 compared to 1.93 in the previous sale at the beginning of the year. still with us, oksana, krisha and robert. oksana, what does it say when you have a big shakeup on the

back of a third-year option in france? oksana: that is what happens when you have a market that has for so many years relied on a non-economic buyer for so many years. you have talked about the bonds are winning, it is easy to win when you have the support of $30 trillion in demand that is not -- demand that doesn't care about the price. as you are starting to come off of that, of course the market is looking for clues. is there a demand, will it support the market, and an auction like that certainly can be spooky. jonathan: the 2017 high for bins for the year and -- or was it something more fundamental? robert: you really have a tale of two markets. the bunds and everybody else. so the bund yields are broken out, but it's i am bonds that italian bonds in french bonds have not

broken out new highs, because they have been widening. they have disproportionately benefit from the ecb policy. the ecb is backing off and now they are taken the biggest hit. right after the initiation of the qe by the ecb, there was a big selloff in the 10 year bond, taking it up to about 1.1%. the markets are very good that after the markets panic and by, they panic and sell. so you could see somewhere weakness in bonds, but i do not think he will be topping 1% for a long time. jonathan: is that what you see, the supplemented in market? they are pushing high, but then they see the ecb is not going to go that quick. krishna: that has been the case of far. however, i think the one thing we have to be mindful of is the fact that ecb may be tightening policy the way the fed did a year ago and as a result there may be a reaction to that at the front end of the curve, more than but we have seen over the last few years. but having said that, europe faces the same inflationary

conditions, actually probably worse, than what we face in the u.s. therefore the outlook for rates has to be, it does not mean it has to be on the basis points where it is today, but it is not rising meaningfully. if it does, we will see the economy slowdown and rates go down after that. jonathan: how much has the market misjudged the committee edition of the ecb? it was a big topic last week, the ecb seems to think the market misjudged it. what do you think? oksana: with respect to the fed and ecb i would not call it misjudging, but consistently calling their bluff, saying you will not be able to follow this path.

and it has, at times, through significant stretches, been correct. bring it back to what it means for portfolios? what investment implications doesn't have? if we are thinking that this can cause the equity markets to go to corrections, what will be the force in the portfolio to diversify if yields are backing up and it is no longer risk-free? jonathan: if you think about was central banks forced everybody to do, they forced everybody down the curve for more yield and down the capital structure, taking on more credit risk. if you reverse engineer that and you have central banks worried about risk, what happens to that development over the last 5-6 years? does that reverse? do you have to go up and quality? krishna: i think the banks are aware of that specific issue. the last thing they want to do is -- the growth we have in the world. so if they take any action, they anticipate a result of that would be a massive correction and equity prices, despite the

protestations about the valuations in the market and i think they will back off. the way they have backed off materially over several times the last few years. jonathan: robert? robert: on ending qe, the u.s. ended it and where the yields now, and where were they then? they are lower in the backend now and that is what will play out in europe. in europe there was improvement with the french election results and you will have a move toward a fiscal austerity in some of these countries, but better underlined fundamentals. you already see it coming through in the euro. they have a credit counselor, they will be attracting some of the capital they have lost over the last few years. the pushing up of the euro will doom them in terms of hitting the inflation target. as a result they could get up to zero and into the bond buying, but they will be stuck and all of the yields well over zero are going to be positive return

generators for the bond investors. jonathan: given the week we have had, we have had a backup of yields in quite a lot of places, have you been taking any pickings out of there at the moment? where are you looking at? oksana: back to the earlier question, what is the undoing, what does it look like and what happens in the environment? if we are thinking about the fed and central banks continuing on their path, it is not going higher quality that will help you, it is higher yield that will help you. at the same time you have concerns about fundamentals in that part of the market, with the higher yield part of the market. we are in the camp of de-risking. so you want to be in that part of the market that will give you a cushion to absorb the interest rate affect in an environment where you have such a little tolerance. look at the past week, we saw ag's fall 1%, lose 30% of the year to date return.

so that's the lack of cushion. so to reduce the volatility you need to provide a little bit more. jonathan: oksana, krishna, and robert. let's get a check of the markets. treasury yields, higher much higher the backing of the curve, up nine voices points -- up nine basis points. still ahead, the week ahead featuring janet yellen's testimony and the bank of canada rate decision is in there as well. things are getting more hawkish. this is bloomberg. ♪

♪ jonathan: from new york city, i am jonathan ferro. this is "bloomberg real yield." the final spread, coming up the g-20 summit wrapping up this week and janet yellen testifies in front of congress, the president in france for bastille day, and bank earnings and a rate decision is coming from the

bank of canada. of course, with rates and protectionism at the g-20 and emerging markets facing a major test this week as bond yields go back up. sentiment starts to sour and money starts to flow. the story for the emergency that emerging markets, do they have the resilience to carry this through? krisha is with us, oksana and robert as well. when we talk about risk, let's talk about the asset class for the rest of the year. em, big bid, banker bid through 2017. is this a test right now? in 2017. is this a test right now? oksana: mrs. of the beginning -- this is the beginning. the rhetoric has been self-serving. we have watched them gobble up $35 billion on the debt side, more of that on the equity side, and the rhetoric from em has been resilient. we have not really seen the fed

continue with they are doing in rates going higher, we have nothing the dollar stressed or oil wobble and we do not know what will happen in china. and what do we have today? we do have stronger numbers out of china, but the em is not reacting to that, they are looking at central banks continuing on the path. so it is very important to stay focused on the fact that em has traded with the central bank policy and not on fundamentals. a jonathan: krishna, just very quickly, em carry trade is under a lot of pressure. does it break? krishna: right now, yes. does it break, no. we continue to believe that em that will probably be the best-performing asset class in fixed income. what is reacting to his there rising yield and the dollar and at some point that will fade because over all we believe that u.s. yields will stabilize and the dollar will stop rallying. jonathan: robert, you been on the program before, each of you in your boxes, a question coming to you and we need one word

answers. treasuries, 3% before 2%. which one? krishna: 2%. oksana: 3%. robert: 2%. jonathan: ken mario draghi avoided bond tension this year? krishna: yes. oksana: yes. robert: has a going on right now. jonathan: cashing in? oksana: not in risk-free asset so far. a robert: buy the dip. a a robert: buy the dip. jonathan: that wraps it up. oksana, krishna and robert. from new york, this is "bloomberg real yield." ♪

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