city to: from new york our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, the u.s. payrolls report delivers. jobs increase more than expected and unemployment drops to a 16 year low. former fed chair alan greenspan says there's a bubble, but not in equities. it's in bonds. hertz leaves investors flying. the auto company gives bond traders the silent treatment. we begin with a big issue. a solid job report the united states. >> this is a very fine report.

>> these are good numbers. strong is a rather economic report, but i don't think it moves markets much. >> the labor force taking up. the wage number beating expectations. i think the recovery is continuing. >> until we see a look back at 2% in terms of that core inflation rate, the fed probably gains quantitative tightening, but it won't raise short-term rates this year. >> the one thing that we are not seeing that was commented on is wage inflation. why are to be seen wage inflation despite the fact that the economy is strong? >> we obviously would love to see wage inflation in the system. wage inflation means we are putting more income and consumers pockets. when consumers have more income and we lower the tax rates on top of that, they will have more money to spend, driving more and more economic growth, so that's what we really want to see. jonathan: joining me around the , the headhael collins of global interest rate strategies at td securities, and

joining us from california is nick from janice investors. let's begin with you and talk about the federal reserve. it's a solid jobs report, but it doesn't it?e, priya: they are almost not trader independent, but the hike in december -- i does make it moves the needle. you are seeing signs of the labor market slack going away. there are signs of wage inflation picking up. all this week inflation data that we have had the last three or four months is hard to ignore it if wage inflation is picking up. this is one off prices, but wage inflation is picking up and real income is right. for the december hike, which was 35%, and the reason i'm not higher than 50%

is because of financial remain remarkably easy, i think they might begin a hike in december. michael: i think they should hike. i would hike in september before i start tapering the balance sheet. our view has been the more that they taper the balance sheet, it's effectively a tightening of monetary policy whether they want you to believe that are not. the further that goes, it lowers the probability they will be able to hike. i think they should get as many bullets in their chamber as they cancel they can cut and a nexus session. -- in the next recession. jonathan: i look at the job report and it looks at one more hike this year. it looks like four more interest rate hikes in 2018. we put that question earlier this week and he said good luck with that. there seems to be a huge spread with what to expect from the fed next year given we don't know who the fed chair will be. there's a lot of unknowns coming up, isn't there? we are in anin anick:

environment of unknowns. in 2016, they projected for interest rate hikes and they did want. in 2017, they projected roughly three and they are on a path to maybe achieve that. unlikely to take the under of that relative to what priya and michael are saying. as we look at 2018 as a guide come our guest is that the fed is likely to undergo liver, typical of what they've done -- under deliver, typical of what they've done previously. priya: we have to think of the hiking cycle as a normalization. when the funds rate is 1.5-one 1.7%, your real rate is essentially zero. as our star is rising, the people going for four hikes say you want to actually tighten. i'm not so sure. michaeljonathan: i'm looking ate

dot plot and the federal reserve gravitates toward the market. nick, earlier this year the market was led by the fed very briefly. it just feels like the federal reserve has lost conviction over the last couple of months on their own forecast. do you anticipate the dot plot so to speak is about to gravitate down toward the markets view of the world? nick: it has to and that's a matter of fact. if you look at what forecasting has done over the past quarter of a century, the markets have got the market wrong in the sense that they projected rates to be higher. in most cases, they finished lower throughout the year. i'm talking overall rates and not just the cash rate. we are in an environment where we live in a world of doves. let's look at the market environment. you have data that sweet, inflation that's weak, walking back on hawkish remarks, moving

off potential rate hikes. accommodation is here to stay. while we may be unwinding it over time, it's going to take time. that's what people need to realize. a lot of people are calling for the bond bubble to end or pop. we are not there yet. we are not an environment where the will be lots of accommodation. it will remain and it will stay relatively range bound for the for siebel future. michael: the neutral funds rate is not plus two as it used to be many decades ago when we were trying to get inflation lower. now we think we will be in environment over the next 5, 10, 20 years what we will try to get inflation higher. the real neutral funds rate is negative one to one right now, meaning the nominal funds rate is at 10. i think three is a really tight policy that would drive us to recession. jonathan: when you look at what the economic data means for the federal reserve and the market, a lot of people would sit at

this table and over on the trading floors and say these things no longer matter. earlier this week, it really struck me. it looks like the russia probe is deepening in the eyes of a few investors and the curve fall flat. there's still some upside risk expected on the long end from what we might get from d.c. do we need to face that out? priya: and the equity market and the risky asset market, there's absolutely a lot of that trump premium priced in. it's not just taxes. it's deregulation. the bank gets derailed as we get more did bonds and we have the investigations becoming more difficult. lotequities here have alon of downside. we are buying further out of the curve because there's a lot more yield. i think it derails the fed hike cycle. jonathan: you look at a 30 year and at the start of the year, people would say that would go

materially higher. is there a buying opportunity in some regards? nick: i look around the world and i say, ok, u.s. yield stick out. the reason being is that you have japanese yields that are yielding roughly 10 basis points. german bunds yielding 50 basis points. whether it's in the 30 year part of the curve or the 40 part of the curve, i'm what he my chops. -- as an investor, i'm looking my chops. globally if i'm sitting in my own country and i'm running 10 basis points, i think there will be a natural pull of rates keeping down, even so the data proves rates up. we will be an environment where d.ta stays range boun priya: i think it matters at the treasury comes with 50 year bonds. and the treasury

tries to fund the fed portfolio come of issuance -- i absolutely agree with that that there is value. there is a risk that the treasury decides to extend a lot more. there's always demand from the rest of the world, but at what price? jonathan: do you really think the average maturity is going to change? we look at it now and it's 70 something. the u.k. is 160 something months. michael: if i were in issuer of , i will want to be on the front end of the curve because consistent with our view that the fed will not hike that much. lower yields will continue to be at the front of the curve. if you issue a 40 or 50 year at a premium to where the 50 your traits. michael, priya, and that will be staying with us. coming up next, the auction erupts, proving the thirst for risk in yield is very real. you are watching "bloomberg real

yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now where there is an appetite for long dated bonds. lastly, at&t. this week. , gm the automakeeek, gm. the automaker sold $3 billion in bonds. united states treasury says it will maintain the issuance of longer-term debt at $62 billion. officials studied the introduction of ultralong bonds

and borrowing needs to increase is the fed traces balance sheet. elsewhere, and eye-catching debt sale they got a lot of people talking. i sold $1 billion of bonds due in 2023 have yield of 6.75%. investor demand was massive. market pointing to this iraqi offering as a warning sign of a potential credit bubble, a debt bubble. a bubble is something that former fed chair alan greenspan spoke about this week. he told bloomberg by any measure that real long-term interest rates are much too low, therefore unsustainable. when they move higher, they're likely to move reasonably fast. we are experiencing a bubble, just not in stocks, but bonds. this is not discounted in the market price. joining me now is michael nick.s, periya, and what is a bond bubble? how do we define it? priya: a bubble potentially would be you have got fundamentals and pricing that is

widely different. there is no bond bubble. i like equities where you have a string of cash flow. it harder to see it in bonds. we have a series of cash flows in bonds. i would argue the reason i don't think there's a bond bubble is that if you look at the funds rate, i've people telling me 1% and our view is closer to 2%, but at the funds rate ends at 2% , is not really much of a bubble. this the fed hiking cycle component of that. the other part is demand from the rest of the world. that is significant. tell me that mario draghi will be extremely hawkish and blooms will be higher, sure. but is that a bubble or repressing? i will disagree with this idea, but there are views across the board. jonathan: here is how i think about it. how we look in 10 years when we look back 10 years? have only look at that massive jolt of bonds -- how will we look at that massive jolt of

bonds? how to be of the government's -- do we think of all these governments who issue all that with zero interest rates? are we going to look at them and say, what on earth? michael: in 10 years we will look back and say i wish i bought more of these long-term treasury bonds at almost 3%. somewhere between now and that 10 years, we are going to have a recession. in that recession, are 10 year will not be at 2.25%, it will be at 1.25%. it will be a roller coaster ride between now and then. i'm looking at alan greenspan coul . i feel he's having a flashback. he was talking about stagflation the other day. that's when you have week economic activity and high inflation. we have the opposite of strong economic activity and lowflation. in the future, real yields on risk-free assets -- i don't think they should necessarily be positive. priya: i agree with you entirely. the 10 year question depends a

lot on inflation. absolutely these prices are mispriced, but i'm not so sure with technology and the good economy that these bonds are becoming larger and larger and the share of the labor is declining. i'm not sure inflation is really about to take off. jonathan: the story of a bond bubble of the idea that argentina could come to the market and issue a century bond at a decent yield and iraq has offered it seven times oversubscribed. when people comes to you with those issues, what do you say to them about your own thoughts? nick: i think there's massive complacency in the market place . we have insatiable yield and lots of uncertainties and people are engaging in risky behavior. why? they are trying to replicate returns of yesteryear. how do you do that? you have to move down the credit spectrum or move down the maturity curve. when you look at iraq, iraq is looking at themselves and say, let's get into this game, and why not?

is a perfect addition to issue new debt and lock in low rates. iraq tried to issue debt in 2015, but there was a decline in oil revenue and one with the islamic state. there was government instability in the market was pricing somewhere around 10%. they did end up issuing about a billion last january, but that was u.s. government guaranteed. two years later what we found is great trumps risk. people are so thirsty for yield and there's this fear of missing out. it is sometimes oversubscribed and 3% ha tighter. i'm not saying that's an appropriate, but if there is a flight, i will not say it's to iraqi bonds. like they have been saying, greenspan is essentially doubling down on comments made two years ago. the reality is the stock bubble is a result of a bond bubble. welcome to the magical world of quantitative easing. jonathan: i think many people watching this program would agree with you. the way that you look at it right now, there are many things rough in credit and maybe it's

time to load up on solvents. -- softens. michael: you can argue it's getting late in the cycle. it feels to us that a lot of investors are piling into credit. they're going down and quality. there's a lot of private debt talk. they're going down in capital and doing things you're not supposed to do later in the cycle to get that extra yield. we are definitely going the other way. we are definitely upgrading the credit risk in our portfolios, reducing exposure. jonathan: does that include buying a greece type issue? michael: in a way. it feels like this pricing pressure, which means the inability of companies to raise prices spreading across a variety of industries, and it's causing problems. . e and youat greec inc

can argue that they are from the mentally prevent. -- fundamentally improving. jonathan: that's brave, mike. michael: i think they will pull back really slow. fed tapering is like watching paint dry, the ecb has to get down to zero purchases, which could take a year or year and a half. then they have to get that -40 basis point yield to zero. jonathan: michael collins, priya , and nick staying with me. was get a check of where the markets have been this week. yields lower on the long end. we are down by five basis points on the 30 year. 10 year creeping down three basis points on the week so far. still had, the final spread. the week ahead featuring bond investors looking for answers from hurts. we will get that in just a moment. this is "bloomberg real yield." ♪

♪ i am jonathan ferro and this is "bloomberg real yield." time now for the final spread. opec and non-opec members will be meeting another dobby to discuss compliance with production cuts. and mexico rate decision and earnings from of all places, hertz. you might ask why we are highlighting them. the company disclosing that it was not going to use the proceeds of a recent sale of senior debt to buy back existing support bonds as it had previously indicated. hurts did not give a plan for what it was going to do from the senior bond sale just to month ago. still with me as michael collins, priya, and nick from janice investors. in the consumer discretionary space, this is the most traded

debt. the volume of it is ridiculously high. everyone's talking about it in the current space. if someone put that credit in front of you now, what would you say back to them? michael: it's highly traded because it's exciting and there's a lot of news and volatility. the markets are looking for a volatile story they can trade around a little bit. earlier this year, there was reduced exposure to the auto rental space, auto rental asset backspace, and even the auto space and the auto supply space to some extent because it looks like that whole sector has maybe peaked. , youran: nick?, you thoughts? nick: i would agree with michael. i'm a capital investor and looking at some form of generation and i want some stability and my portfolio where we can collectively a crew income on an ongoing basis and sleep at night. we are not the type of people that will be chasing returns. i think that is what is happening in this environment.

you are seeing more more people and more and more issuers issue debt and lock in low levels of rates and people are willing to buy that because they need returns. jonathan: the auto sector has been fascinating for many people in the credit guys are trying to find what the trade is to play up the back of it. the guys a macro are looking at treasuries and ou all of a sudden thinking about auto sales. what are you thoughts right now? priya: the market has reacted to the weaker numbers. if you look at my terminal, you see the auto sales seasonally adjusted annual rate. it has been falling off. you could expect it with a hybrid placement value of cars. people are not moving and changing cars that often. that 18 million was a pretty high number. it has been falling off, but what the markets are now wondering is that you have a fed that is tightening and normalizing. you have inflation not looking that hot. what if growth is falling off as well? they are using any leading indicator of consumption. jonathan: you are not reading

that chart and looking at a weak consumer, do you? michael: i think the consumer is in a great spot still. that being said, the underlying trends among consumers is changing really quickly. i had a meeting yesterday with a bunch of young women just entering the workforce. i said, do any of you have cars? absolutely not. it's a different environment consumer products companies. there's a lot of churn and things going on. there are a lot of other sectors you can pull up. housing to some extent looks like it may be is a little t oppy/ job. job gains looks through that. jonathan: we finish off with a rapidfire around and wrap it up into three questions with one word answers please. low inflation forever or stagflation around the corner? michael: lowflation. priya: lowflation.

nick: ditto, lowflation. jonathan: if greenspan was a trader, would you take the other side? michael: yes. priya: i would. nick: absolutely. jonathan: would you buy the 2023 iraq bond or the hope note of a similar maturity? michael: well, maybe the iraq bond. priya: the iraq bond. nick: wow, that's a tough one. i would probably stick with the u.s.. jonathan: going to leave it there. andael collins, priya, nick, from new york to our viewers worldwide, you are watching "bloomberg real yield." ♪

vonnie: this 12:30 p.m. in new york and 5:30 p.m. in london and 12:30 a.m. in hong kong. i am vonnie quinn. welcome to "bloomberg markets." ♪

vonnie: from bloomberg world headquarters in new york, here are the top stories on the bloomberg and around the world that we are following. the dollar is reversing course, strengthening today. andsuries are falling results are mixed after stronger than higher results in july. what's pushing equity investors to rewrite trading theories. bill gross gives his reaction to jobs data. he thinks we have two separate labor economies in the united states. alley on the future of its giant bond firm on a new manager at the time. that that is paying off as pimco received a record $62 billion in inflows in the second quarter. we will discuss. weakness ofbout of the u.s. dollar is impacting multinational