♪ tom: from new york city for our viewers worldwide, 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. the consensus, august will be revised higher. where is the wage growth? first carney, now president 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. and we start with the big issue today, with our 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 of our 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 problem. we have had all sorts of numbers. but when it is not confirmed by other data, consumer confidence remains very 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 at 2.5 for a long period of 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 part 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 guests on the fixed income market and the changes to come in september. we have a great lineup. andrew chorlton joins us from schroder investment management, lisa abramowicz from bloomberg gadfly. she really didn't want to join, but she said, ok, i'll join. [laughter] tom david riley with us in : london, an important london for fixed income and credit strategies, bluebay asset management. what we are going to do is 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 irony is, when you talk to economists, they say it could have a depressing affect over -- effect over the next few months, but over the longer term it could lead to higher inflation and faster growth as people pump 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: let's get started away from harvey. part of that is the jobs report. 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 -- what was it 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 appropriate that we gave it a pause. we would still suggest remaining cautious in your -- tom: in a few sections today, we will look at the issue with mnuchin. david, let me go to you in london on the broader strategy here. go,e is a number of ways to 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 are going to matter a lot. i think in terms of the ecb, there is clearly 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 i think would be potentially a surprising and potentially 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 -- i don't think there is anything in that report that stops the fed from announcing it is going to start shrinking its balance sheet in october. i think 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 do not

know about? 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 specifically is it is the only safe haven in the world with liquidity. you will still get that bid with the risk from geopolitical events. but 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. i have shown this many other times. let's go to the chart. 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. lisa abramowicz, you have done this really only on gadfly. the ramifications of the rollover and the clarion august moment is a retest of nuclear flatness.

it is not a recession discussion. lisa: this is not a recession discussion. but 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 it is temporary. 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? david in london, 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 -- in terms of emerging markets across a lot of our strategies. the treasury yields 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. i guess 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 really 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 an issue? are we going to see inflation rise against that nominal yield and give you a real yield? -- a lower 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 just reflecting the disappointment trade around trump reflation and the sort of -- and some of the 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 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 the lack of pressure in wage growth is something that is surprising and continues to surprise as strong as the jobs market is. the core group 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 the excuse of 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 inflation in terms of fixed-income portfolios can be used as a hedge against risk assets if we see any weakness 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. the u.s. treasury issuances 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: i am tom keene from our studios in new york. this is "bloomberg real yield." i want to head to the auction block right now. this past monday, the united states treasury issued more than $130 billion in notes and bills. they did that in an 90 minute span. we're focused on the five-year $30 billion debt sell at 1.742%, the lowest since october. primary dealers took just 17.5%, an all-time low. the next day, a four-week $25

billion treasury bill auction in the final moments of calm. -- 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 is near a record level. that is an important item. 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, listen to me butcher our conversation, david riley is 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 of what we are seeing from manufacturing right now, it seems like we should be getting more inflation. people are getting a little bit 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. but you live auctions at schroders. what is it like on the schroders floor when you actually have a big and important september 20 auction? andrew: we are trying to take a longer-term perspective. tom: so 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 you get in august because so many people are away. even the payrolls data, people are saying, well, back to school kind of messes with payrolls in august. i think certainly 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 morning, 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 tend 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 sir john templeton, the idea of the shortage of paper. that is a critical concept. is there a shortage of paper in full faith in credit or 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 are 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 even 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 forced -- are for 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 u.s. investment grade actually 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, and yet we haven't seen the same high-yield issuance in the u.s. actual sales of u.s. junk bonds so far 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 period last year. from 2015, 2014 and 2013. we are not seeing record bond issuance. this is great. go,> you can go to history and 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 down, even as we are getting outflows. it is 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 there? tom: lisa abramowicz providing wisdom from bloomberg gadfly today. let me look at the markets now. the idea of a market check. 2's, 10's, and 30's. we've got there the one-week move. the yield 2.14% of 10 year. 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."

it is time for the final spread. coming up over the next week, a real 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. david, i want to talk about how important fixed income research is. i have always learned that particularly 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 mifid ii? i can't pronounce it. with mifid ii, 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 happen ultimately with research provided into fixed income for -- from brokers, as result of mifid ii. we, as well as many others, are going for a process of assessing what is available for research, applied discovery process with brokers, 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 is that macro is -- a lot

of that information is public good, it is out there. we have good access to policymakers as well. so, we think we can absorb this impact. tom: andrew, you are in the trenches on this. schroders in london and frankly, i think with 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 a little bit without giving away the secrets of schroders. andrew: we put a premium on our internally produced research, a strong fixed income and equity data team. that is getting most of the investment. as the negotiations with the ifid ii 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. tom: brutal. lisa: but it is true, this is why you are seeing banks lowering and lowering their

expected prices. credit suisse lowered their price to a very competitive rate of zero for their fixed income research. that was the story on the bloomberg today. tom: but i interviewed james sweeney there, head of global economics and i believe mr. sweeney has children that need to be fed. how does this work? lisa: and how does this follow the mifid guidelines? how do they provide it for free? i don't know how that works. but 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: if you go back to why wasd ii is happening, it 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 just see higher quality research produced both internally and externally, and the weak hands will not be with us. tom: thank you so much, david riley, from london. he is an asset manager. there is much to talk about coming up. lisa, thank you for joining us. we never see each other. people think we do. we sort of like go down the hall. lisa: it is just sad. tom: it is just sad. from new york, that does it for us. we will see you next friday. jonathan ferro. "bloomberg real yield." ♪

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