jonathan: from new york city, i'm jonathan ferro, with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, payrolls top estimates, but wage growth disappoints. central-bank policy nervousness continues to grow, bund yields climb. protectionism dominating g-20, as emerging markets face a major test of a big year of outperformance. we start with the big issue, a but wage.s. payrolls, growth disappoint. >> look at labor force

participation, it's a solid report. we need to get more americans back to work. some americans are opting not to join the labor force, and it's important that we make it attractive for them to join the labor force. >> you are talking about 200,000 jobs, the three month moving average is 394,000 jobs. thatalmost inconceivable, wages in price pressures are going to eventually show up. it will not bring bond yields down very much, and it is not going to call the fed, i don't think, beyond a very short period 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 gain, not necessarily for wages -- has one hike perhaps

left in the year, probably in december. jonathan: joining me around the table, the cio at oppenheimer funds, the alternative fixed income strategist at jpmorgan, and the chief investment strategist and head of global bonds for pgm. chris, let's start with you. does that payroll change anything at all for the federal reserve? >> not really. the fed was committed to tightening policy anyway and this gave them more support,. whether it is the right policy or not, you can talk about. but at the moment, they are tightening, and doing something either on the balance sheet or the policy rate front pretty soon. jonathan: a guy from new zealand, talking about the relationship between unemployment and inflation. the phillips curve is what came out of that. where's the reflation? where is the wage growth that comes off the back of the wage growth? >> that's obviously the big

question on everyone's mind, but let's remember a couple things. what we are seeing is a broad synchronicity in terms of global growth recovery. we are continuing to see that, in the headline number supports that further. that is perhaps what's driving this broader easing of financial conditions. let's make no mistake, as long as that continues to be the case, the fed will continue on its path of normalization. and further, to the question of wages specifically, we sawa a tepid number on wage inflation, but remember that this is the median number. the san francisco fed did a study last year where they looked at wage inflation for fully employed employee, and they have been consistently above the rate of inflation. in 2016 it came in at 3.5%, for example. perhaps what we are catching here are employees entering the workforce on a part-time basis,

younger individuals, and that may be depressing the number. are we capturing all of it? we are eventually going to see those price pressures in wage inflation. francine jonathan: i have been speaking to guys on this program, it seems that whatever the data says, that's not the story. >> bonds are winning, right? rates were up the last year, and the fact of the matter is that all this discussion of wages and inflation and the fed, those are all red herrings. the fact of the matter is you are supposed to have real wage growth. we haven't had wage growth, that's really exceptional. there's a huge shadow supply of labor, the global competitiveness that's out there is really keeping inflation below target around the world. an fed, they are having

argument and this number makes the difference. the argument is, should we run elow,employment rate b or are we risking explosion later on? we need to get the employment population ratio higher. this has a long way to run. this can be a bad spot for bonds, and we are coming into the second half of what has been hit. >> let me defend robert. the funny comment -- he has a 30 year track record that he has been right on. we have been looking for inflation to come back ever since the financial crisis. nothing, nothing. therefore, the burden of proof

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 will be trying to protect ourselves from. what the world wants more than ond,hing else is a good b and i think that is the driver of yields more than anything else. idea that this whole the inflation argument is going to keep the fed from doing what they say they are going to do, which in addition to hiking is reducing the size of the balance sheet, is not going to be an effective argument. the fed is going to continue on this path and i think there's a lot of complacency about what effect it may have on the market. if you look forward year and the fed is reducing, and there are a couple more hikes that have been baked in, and dollars are not being recycled at the same rate, and you don't have the

amount of global appetite for a negative yield bond in europe -- i think all of those factors will continue to push bond yields higher, the respective of what the inflation number is. >> that comes down to the question of whether this is the right policy are not. so yes, the fed is going to tighten, and they are going to tighten irrespective of what the inflation numbers actually come out to be, and therefore it argues for them potentially making a policy mistake as opposed to its being the right policy. if you think about income inequality, that's the bugaboo these days, for the first time you have a potential of workers going up -- the first sign of that, you try to tamp it down. is that good policy? if you are trying to reduce income inequality, the first

sign of wage inflation you try to tamp it down, that is that policy. they will do it but it doesn't make it right policy. jonathan: you have to work out what's the right portfolio -- but what is it? you said bonds are winning. does it change anything? >> i think the ecb has been running the wrong policy. the negative rates were an absolute scourge on the system. for them to wind down the kiwi and bring the rates up to zero will help their system, on balance. in the u.s., it has absolutely been behaving -- this 2% inflation target is a ceiling. preemptively tightening policy. we're going to get a new fed chief next year, and they may be have,ite, more of what we maybe somebody intent on hitting the trump agenda. i think long rates are at or

above fair value. in the u.s., i think that spread has a ways to go. i think the risk is on the equity side. i think the risk is at the bottom of the capital structure, and higher risk balance if you get a hawkish fed. jonathan: that's what i found interesting about this week, the federal reserve worried about high risk tolerance, get the focus of the market was on risk-free asset. make sense of that for me. is the risk where wrist traditionally is? >> it's concerned where risk traditionally is, making it more risky for that reason. we have talked about this in the past. we need to redefine what risk means. when we talk about bonds and the potential runway for return, let's not forget that they are already priced for perfection. you have to have a continuous influx of pretty bad news for bonds to continue to traditional

generating the types of returns that investors have seen in prior years. at the same time, you have had where you have seen what price for perfection means. everyone is talking about how dm is resilient, and what did we see over the past couple years? we saw them struggling to hold on as china was posting strong numbers, but the central banks said, we're turning a little more hawkish. jonathan: i want to get to one thing that will make life difficult for the bulls. that's positioning. long could bring up the into the treasury curve -- they are high. that's built up in a big way. does that mean this has some time to run, that you need to shake it out? >> potentially. i think that is the crux of the issue. from an economic standpoint, dividing with the fed is going to do, nothing has really materially changed. what we are talking about,

decent globalized synchronized growth -- that didn't change over the last week and half. what was different is the bulls got scared, and they headed for the hills. and at some point they will get not so scared and will reload. it may be a few basis points away but it's not 20 or 30. jonathan: he will be sticking with us. auction block, where a soft french auction starts a pretty big bond reaction. this is bloomberg. ♪

jonathan: from new york city, i'm jonathan ferro.

this is "bloomberg real yield." i want to head to the auction block, outside the united states, in the southern hemisphere. in australia, a single buyer snagged $609 million in government bonds, the largest ever amount bought by one bidder, a record dating back to 1982 . a record was close to low level for a southern european lender. the debt sale came as a nervous mood gripped markets throughout much of the week. those nerves did show up in the headline auction of the week, of french sale showed a drop in excess to, a bid to cover ratio of 1.3. table,ith us around the oppenheimer funds, jpmorgan, and pgm.

you've got a shakeout that big on the back of a french thirty-year auction. >> that's what happens when you have a market that has for so many years relied on an economic buyer. about bondsd winning -- it is easy to win supported by $30 trillion. as you are starting to come off that, the market is looking for clues. is it going to come in and support the market at an auction like that? jonathan: was this a technical breakout? bunds broke through their high for the year. was it something more fundamental? >> you have a tale of two markets, bunds and everybody else. bunds are at new highs, but italian bonds, french bonds, they have not, because they have been whitening relative -- widening.

the ecb is backing off, and that is what you see bunds take the biggest hit. right after the initiation of the kiwi by the ecb, there is a big selloff. it took it up to 1.1%. markets are very good after they panic and buy, they panic and sell. butcould see more weakness i don't think we will be topping it for a long time. jonathan: is that what you see? markets push yields high, then they realize they aren't going to go that quick? >> that is what has been the case so far, but the one thing we have to be mindful of is the fact that the ecb may be tightening policy the way the fed did a year ago, and as a result there may be a reaction to that a bit more there will we have seen over the last few years. but having said that, europe

faces the same inflationary conditions, and probably worse than what we face in the u.s. therefore the outlook for rates has to be -- it doesn't mean it has to be on the basis point where it is today, but it is not rising meaningfully. if it rises meaningfully, we will see the slowdown in the economy. jonathan: we are trying to work out whether the market has misjudged the communication from the ecb. a big topic of discussion last week. the ecb thinks the market misjudged it? do you think they misjudged the words of the central bankers? >> i think the market, with respect to the ecb and the fed, has been consistently -- i would call it consistently calling their bluff, saying you will not be able to follow this path. it has at times been correct. but let's bring us back to, what does that mean for portfolios? what investment implications

would this have? this can cause equity markets to go through a correction. what is going to be the force in your portfolio to diversify that effect if what's happening to your income is, yields are backing up? jonathan: if you think about what central banks forced everyone to do -- and i had this conversation throughout the week -- they forced everyone down the curve and down the capital structure, taking on more credit risk. if you reverse engineer that, with a load of central banks worried about risk, what happens to that development over the last five or six years? is that the reverse? is that the story you need to go up in quality? >> i think the central banks are extraordinarily aware of that specific issue. the last thing they want to do is unravel the growth that we have in the world. so if they take any action, if they anticipate the result of that would be a massive correction in equity prices,

despite their protestations about valuation, i think they are going to back off, the way they have backed off materially several times for the last few years. >> two things. mbqe, we had the taper tantrum, real yields now, and where were they then? that is what's going to play out in europe. in europe you had a fundamental improvement with the french election results. you will have a move towards fiscal austerity in some of these countries, but you will have better underlying fundamentals. you are already seeing it come through in the euro. there will be a current account surplus, the pushing up of the euro is going to doom them. zero, butke it up to they are going to be stuck. yields well over zero are going to be positive return generators. jonathan: given the week we have

had, you have backup and yields in several places. where would you be looking? >> i think it goes back to the earlier question. what does that look like? what happens in that environment? if we are thinking about the said and central banks globally continuing on that path, and it's not going higher quality that will help you, it's going higher yields that will help you. you haveme time concerns about fundamentals in that part of the market, high-yield part of the market. we are definitely in the camp of de-risking due to valuations. you want to be in the part of the market that gives you a cushion to absorb the interest rate affects in an environment where you have such -- look at the past week. lose 30% ofll 1%, year-to-date return. -- you need tok

be in areas that provide more. oppenheimer, jpmorgan, pgm, sticking with me. let's get a check on where the market has been this week. treasury yields higher on the back end of the curve. up eight basis points at the 10 year. ahead, fed chair janet yellen's congressional testimony. a bank of canada rate decision. will things get more hawkish? this is bloomberg. ♪

jonathan: from new york city, i'm jonathan ferro. the final spread. coming up over the next week, the g-20 summit wraps up, janet yellen testifies, donald trump earningsnce, and bank

and a rate decision is coming from the bank of canada. with rate protectionism in the g-20, emerging markets are facing a major test this week as core government bond yields back up as well. sentiment starts to sour, money starts to flow. the story for the emerging-market complex, a big year for 2017. doesn't have the resilience to carry it through the year end? our guests are still with us. risk, let's about talk about a test for the asset class. e.m., big red through 2017. a big test right now. >> this is the beginning of the test. this is what i have been saying for quite some time. the rhetoric earlier in the year has been very self-serving. we watch them gobble up $35 billion, in the rhetoric has been resilient, and it's different this time.

what we haven't really seen the fed continue, we haven't seen the dollar strength, we haven't seen oil wobble, and we don't know what will happen in china. today we have stronger numbers out of china, but em is not reacting. it is reacting to the fact that central banks are continuing on their normalization path. very important to stay focused on the fact that em has traded well with central-bank policy, and not on fundamentals. jonathan: quickly, the and carry trade is under a lot of pressure. does it break? >> absolutely not now. we continue to believe that em is going to probably be the best-performing asset class in all fixed income. today, is reacting to rising yields in the dollar, and at some point that will fade, because overall we believe u.s. yields will stabilize in the dollar will stop rallying. jonathan: we have to read exempt with the rapidfire around. the questions come to you, one

word answers. treasuries, 3% before 2%, 3% or 2%? >> 2%. >> 3%. >> 2%. jonathan: can president draghi avoid a bond tantrum? >> yes. >> yes. >> doing it now. jonathan: em, buy or cash in? >> buy. >> not in risk-free assets. >> buy. jonathan: that wraps things up. from new york, this is "bloomberg real yield." ♪

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