♪ tom: from new york city, i am tom keene in for jonathan ferro, with 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ tom: coming up, a busy show. yields move higher after a mixed jobs report. august will be revised higher. the consensus. august will be revised higher. where is the wage growth? draghi and the ecb struggle with delaying balance sheet adjustments until december. is it real yields lower for longer? and it is september.

the city and wall street consider how fixed income research will survive as we know it. we start with the big issue today, without question, the u.s. jobs report. >> one month is noise, and the next few months will be noisy because of the disruption of the hurricane. i'm not sure i would put too much stock in those numbers. >> it is on the softer side. it benefits all their positions in international markets where we think returns will be higher, but we shouldn't forget that this number will be back on track before long. >> claims are much more stable than, you know, payrolls, and they are not showing any problems. we have had all sorts of numbers. when it is not confirmed by other data, consumer confidence remains strong, i think the market is going to blow this off. >> the first thing i looked at was the wage number and it has been flat for a long time. we need to put more money back

in u.s. consumers pockets. that is what we're trying to do by wage growth and tax efficiency. >> i think the fed is focused on wages and certainly inflation, to the extent that this is an effective impact. this is a weak report. tom: the best thing about bloomberg today, the jobs report and those important voices. when i talk to jonathan ferro, i said 30 minutes, you got to be kidding me. we can do three hours with our guest. we have a great lineup. andrew chorlton joins us from -- head of -- schroder investment management, lisa abramowicz from bloomberg gadfly. she really didn't want to join, but she said, ok, i'll join. david riley with us in london, an important london for fixed income and credit strategies, bluebay asset management. we are going to dive into the news flow. lisa, i have to go to you first on harvey.

it has been an emotional time. all the damage, the rescue, the many, many -- too many deaths. as you go into september, what does harvey mean for the fixed income market? lisa: the question is does it have a broader effect on the u.s. economy? and how? and the iron he is, -- irony is, when you talk to economists, they say it could have a depressed affect over the next few months, but over the longer term it could lead to higher inflation and faster growth as people put money into infrastructure. tom: the scope and scale, the population of houston, but the answer is the nation's fixed income market is so deep, even the fourth biggest city does not move the needle. lisa: that is right. that is right. people are not really counting it in their expectations. tom: before we go to london, let me turn to andrew chorlton. how is august? i mean, did you survive in

august? it is always a difficult month for fixed income. as you come into september, the look back to august, what does it look like? david: august showed a correction for fixed-income markets. we gained back a few strong returns in investment grade high-yield, which is only appropriate, we hit post crisis lows in credit spreads in late july. so i think it is important that we gave a puase. we would still suggest remaining cautious in your -- tom: in a few sections today, we will look at the issue with mnuchin. let me go to you on the broader strategy. there is any number of ways with -- to go, whether it is with the jobs report and the like, let's go us to the ecb, the bank of england where you are, and the fed. in september, what central-bank action will matter for you in fixed income?

david: well, i think the ecb and the fed will matter a lot. i think in terms of the ecb, there is more uncertainty around the ecb. people are expecting preparation for an october announcement, but your own reporters today have been suggesting unnamed sources are going to be pushing that to december, which would potentially be a surprising and particularly even risky move to leave it so late. in terms of the fed, despite the weak payrolls report, if you step back from that, i don't think there's nothing in that report that stops the fed from announcing it is going to start shrinking its balance sheet in october. if it didn't make that announcement, i think that would be bad for risk assets. i think people will start thinking, what does the fed know, or what is the fed concerned about that we are not?

tom: price down, yield up. is that one of the risks here, that we see finally yields higher? and prices lower? andrew: i think we could see yields higher. the challenge with the u.s. treasury market is it is the only safe haven in the world with liquidity. you will still get that did with the risk from geopolitical events, you have the fed taper and ecb delay. that is appropriate. should they said 2018's qe before they know what to 2018 will look like? tom: let's go to the chart now. this is two-ten spread. we have been using this time after time. the blue circle in the middle is the trump election, up we go. steeper yield curve, then we rollover. you have done this really only on gadfly. the ramifications of the rollover and the clarion august moment is a retest of new curve

-- nuclear flatness. it is not recession. lisa: this flies in the face of a lot of optimism we are hearing from a lot of analysts saying the stock market has more to go, we are accelerating, people dismissing the disappointing jobs report this morning, saying we will see better wage growth next year. this flies in the face of that . this contradicts that. this says you are wrong. this creates real tension in the market. tom: i love that. david, are you wrong? the idea of curve flattening. just away from the real yield, we had a dollar bull market. that worked out. we have had a dollar bear market. have you been humbled in the summer as you go into september? david: we have not been humbled in the summer, because we have been long in terms of a lot of -- emerging markets across a lot of our assets. the treasury yield combined with the weak dollar has been a

very favorable backdrop for emerging markets. emerging-market currencies, in particular. no, we haven't been humbled but it is interesting in terms of that flattening. the one question i would raise is, if we saw the 10-year move substantially below 2%, what is the tale in there? when we look at the data, we have a great ism today, so all the data suggests the global economy and u.s. economy is doing well, and actually we should have higher yields as a result. tom: david, i want to go to you and then andrew. david, are we going to get to a point where the real yields are at issue? are we going to see inflation rise against that nominal yield and give you a real yield? david: there is certainly a skew towards higher inflation given where fixed income and breakevens are currently priced.

as i say, i think the global economy, the u.s. economy, emerging markets, china always support somewhat higher real yields than we have at this particular juncture. i think to some extent, it is also very reflect in the disappointment trade around trump reflation and the sort of geopolitical risk, hurricane harvey, temporary factors as well. tom: it is a huge conundrum, andrew, this idea of whither inflation. it goes right back to real yields. you've got to talk all day nominal. are we going to see diminishing real yields as we see diminished real wage growth in the united kingdom over the summer? andrew: i think wage growth is -- lack of pressure in wage growth is something that is surprising and continues to surprise as strong as the jobs market is. the people that really wants inflation are ironically central banks. the only way -- the easiest way for them to deflate these asset

bubbles that have been building is to be able to hike rates and use inflationary pressure to do it. tom: is inflation good for schroders? andrew: i think we can obviously manage assets in many market environments. we think it inflation in terms of fixed-income portfolios can be used as a hedge against risk assets if we see any week is there, but whether it is good for schroders, i think most things are good for schroders. tom: we are going to come back and look at the minutia of the market, particularly issuance in the autumn months. we will come back with lisa abramowicz, andrew chorlton, and david riley in london. coming up, we will look at the auction block, as well. u.s. treasuries offering more than $200 billion in notes and deals this week. from our studio in new york and london, this is "bloomberg: real

yield." ♪

♪ tom: tom keene from our studios in new york. this is "bloomberg real yield." going to head to the auction block right now. this past monday, the united states treasury issued more than $130 billion in notes and bills. we're focused on the five-year $30 billion debt sell at 1.72%. lowest october. primary dealers took just 17.5%, an all-time low. the next day, four-week $25 billion treasury bill auction in

the final moments of calm. before sheraton traders look at the politics of washington when congress returns to work next week. that debt matures september 28, the day before the deadline that the treasury secretary has laid out for lawmakers to raise the debt limit. and then looking to the north, thanks to a recent canadian dollar debt auction by apple, harper issuance near a record level. foreign companies issuing in loonies, the canadian currency, have sold more than 15 billion canadian dollars worth of debt this year, the biggest year for maple bonds since 2007. still with us, andrew chorlton, david riley, in london. he thought i would do a worse job than andrew did. we will keep it going here. and lisa abramowicz from

bloomberg radio. a bond expert is here to translate. there are two items i want to talk about in this section. i want to get to the canadian and the apple thing and the loonies in a minute, but that low ratio at auction. that is greek to a lot of our viewers. what does that low ratio mean? nobody wanted the paper? lisa: there is a lot of question right now about what the real rate should be. just as we have been hearing from david and andrew given the fact that what we are seeing from manufacturing right now, it seems like we should be getting more inflation. people are getting a little jittery. tom: you guys live and die by this thing. david riley is doing strategy. i'm doing the tv radio thing. lisa is in the trenches on bond coverage. you live auctions at schroders. what is it like on the schroders floor when you have an auction? andrew: we are trying to take a longer-term perspective. tom: sue you are out three days

instead of the auction? andrew: i think you have got to take with a pinch of salt a lot of the data in august. even the payrolls data, people are saying, well, back to school kind of messes with payrolls in august. as we get closer to the timing of the debt ceiling, you will see more noise, but there are some interesting comments on bloomberg tv earlier this month, they are going to get it done. the u.s. isn't going to default. we do not see that. we do see potentially volatility picking up and some opportunities as a result, but we don't see something catastrophic. tom: you're trying to talk like me. be careful with that. i'm done with you. david riley in london, one of the comments i always remember from john templeton, the idea of the shortage of paper. that is a critical concept. is there a shortage of paper in

the corporate bond market now? david: there is a shortage of safe assets within the eurozone. that is one of the dilemmas the ecb is having to shoulder with in terms of their bond buying program. the safe asset is the bund, and the german government, unlike most governments, is running a balanced budget, or a surplus, so not really doing the issuance. in terms of a corporate supply, one of the reasons, and sort of alluded to this earlier, but a reason we have seen some backup in spreads in u.s. investment grade over the summer months are two reasons, because supply has been so strong, and we expect another big print of supply coming into the market in september. we have actually been lining up in terms of europe investment grade. we have been moving more into euro investment grade paper. tom: you want to mention

something? lisa: one thing i find really interesting is people talk about the glut of investment grade bond issuance, but we haven't seen the same high-yield issuance in the u.s. actual sales of u.s. junk bonds this year, below where we were in 2014, 2013. you can look at the my terminal right now the blue lines in my , terminal show it is up year-over-year from the same time last year. from 2015, 2014 and 2013. we are not seeing record bond issuance. this is great. andcan go to history navigate all the custom dates you want. you can do the same year-over-year period. i find this fascinating, this highlights the sort of conundrum. frankly, this is why yields in the junk-bond universe are going outflows, the supply. tom: are apple and other

companies in the u.s. still going to go abroad to other companies to issue paper? lisa: they are diversifying their balance sheet. and their financing, i mean they have businesses in canada, why not issue in loonies and not have any currency risk their? tom: lisa abramowicz providing wisdom from bloomberg gadfly today. let me look at the markets now. look at twos, tens, and thirties. we've got there the one-week move. that green number, that should be three basis points lower on the yields through the week. it has been a tumultuous week to say the least. there we are with the one week yield. ♪

♪

tom: i am tom keene. in for jonathan ferro. this is "bloomberg real yield." the final spread, coming up over the next week, the interesting flow of news to get your september started. a german election debate, a summit in china and of course, the united states congress returns from recess and rate decisions, we will see that later from canada, and the ecb. still with us is andrew chorlton, schroder investment management. lisa abramowicz of bloomberg gadfly, and david riley in a london that will be forever changed, he is with bluebay asset management. i want to talk about how important fixed income research is. i have always learned that in crisis, guys like you and andrew, always in every case, the fixed income people are out front of equities. how important is fixed income research in with the new lower

pricing of mithet 2? with mithet 2, what is going to happen with fixed income research? david: it is a good question. we still don't really know the answer, as to what is going to have -- happen ultimately with research into fixed income for mithet 2.s result of we, as well as many others, are going for a process of assessing what is available for research, how we're going to absorb those costs, what it means in terms of our clients, but fundamentally what we have been doing and reflects our basis as a house is strengthening and building our in-house research capabilities. one thing about fixed income as well when you are dealing with macro, macro is -- a lot of

that information is public good, it is out there. we have good access to policymakers as well. we think we can absorb this impact. tom: andrew, you are in the trenches on this. in london and frankly, in new york, is in the crosshairs of this. how are you speaking? you are on the buy side managing money. they are on the sell side. what is that dialogue like? take us into that dialogue without giving away the secrets of schroders. andrew: we have internally produced research, a strong fixed income and equity data team. that is getting most of the investment. as the negotiations with the banks -- mifid banks continue, i think there will be a quality element to it. tom: fewer people. andrew: some people not willing to pay a penny for it. lisa: but it is true, this is

why you are seeing banks lowering and lowering their prices. credit suisse lowered their price to a competitive rate of zero for their fixed income research. that was the story on the bloomberg today. tom: i interviewed james sweeney there, head of global economics and i believe mr. sweeney has children that need to be fed. lisa: but how does this follow the mifid guidelines? how do they provide it for free? i don't know how that works. they will set an interesting model here. tom: can we go longer? andrew, i think this is absolutely critical. do you end up talking to only five big firms, or is this good for the boutiques? andrew: mifid two was designed as an inducement to trade. i question whether the people that have that assumption have managed money before, because we don't trade unless we think we think we're going to make money

for our clients because the performance pressure is such. i think you will see higher quality research produced both internally and externally, and the week hands will not be with us. thank you so much, david riley, from london. lisa abramowicz, andrew chorlton, thank you for joining us. thank you for joining us. we never see each other. people think we do. we sort of like go down the hall. ♪ tom: from new york, that does it for us. we will see you next friday. jonathan ferro. "bloomberg real yield." ♪

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