jonathan: 30 minutes dedicated to fixed income. this is bloomberg "real yield." ♪ jonathan: the jobs report shows payrolls falling and wage growth surge. the short list for the next fed chair reaches the president's desk. the divide between madrid and barcelona continues to grow, sending spanish funds lower and lower. we begin with a big issue, wage growth surging. >> this is confirmation we are

getting real wage growth. >> 2.9% wage growth is the headline. >> i think that is good for american workers. >> looking at the wage growth, the unemployment number is the bright news. >> janet yellen said in a healthy labor market wage growth is between 3% and 4%. >> wages begin to rise towards 3%, they certainly are. slamdunk infed is a raising rates in december. >> this confirms a story permeating the market. the fed has said they will tighten, therefore december is pretty much in the bag. >> i think people will rightly interpret the second move. they will go in december. two and three times next year. jonathan: joining the is oksana, from j.p. morgan asset management. head of american fixed-income strategies. coming to us from edinburgh,

senior investment manager at aberdeen standard investments. i want to begin with payroll report. the estimate was 80,000. -33.number was wage growth came in hot. 0.5% month on month. almost three percentage points of the year on your figure. george, it was a whether impaired job report. we expected a headline number but there was excitement around wage growth. george: there is a slight impact from the weather. by and large it is heading in the right direction. you scroll through. the markets have been waiting for this. i do think even if we get weaker growth numbers, the fixed income market will get more defensive. jonathan: interested in a reaction in the market.

treasury yields by four or five basis points. we reversed that move. what you make of the intraday activity around the jobs number itself? >> this is a strong jobs number. the unemployment rate lowest in 16 years. participation rate is up, wage growth is up. we have to stop interpreting good news as bad news and bad news as bad news. 2.4,inly treasuries at became an interesting buying point. what is the case at which the fed will move? the next move towards the end of the year seems to be in the back at this point. what happens after that? can this structurally untested market that we will talk about later really handle that? jonathan: let's talk about why the markets stopped trading on the wage growth figure. >> i think it's maybe to do with

the fact we saw it with the adp yesterday. everyone knows the payroll difficulties versus the household difficulties. we get a bit of volatility around the number. everybody sits back and think about it and we get back to normal again. yields will go higher over the long-term that people will digest the weather report we had. jonathan: it is the weather report and of the jobs report. i want to get to the positioning story. you did your clients survey. respondents showed a huge short position in treasuries. how critical is that to some of the price action we have seen on the screen? oksana: i take a bit of a different view because you hear and read a lot about the short positions being supposedly the od.gest in a multiyear peri where is all the money?

it is an traditional, purely interest rate driven best trillions of dollars on that side of the boat as yields continue to come down. people just can't get enough of it apparently. make no mistake about the fact that a lot of the price action within treasuries has been driven by central banks. the relationship between the increase in central bank balance sheet and what yields have done over the last eight to 10 years is an almost one-for-one relationship. the idea that these are these enormous buyers that will provide demand for when rates start to firm up on top of normalization, i don't think it will hold up. looking to with happening with the nominal ten-year treasury yield, what has not been happening with the term premium. described, it is kind of holding. you look at the 10-year rates,

there has been a disconnect here. the fed is also raising short-term rates. we think is the fed's balance sheet unwinds and ecb tapers, it will go away. jonathan: i will allow you to elaborate. how much of a problem there may will be in the coming years? oksana: concentration is a really significant problem when you look at the concentration of interest rate risk and portfolios generally and how that concentration is achieved. not only in the retail market, you do achieve it through ecs. in the case of fixed income it's tied to an inherently illiquid instrument. when you look at the largest etf's across all the sectors, portraits, high-yield -- corporate, high-yields, you have 1000 different holders. when you look at the top 10,

they control 30% to 50% of each one of those etf's. that should give everyone a pause when you consider the top five corporate bond etf's account for more than double the inventory the street is currently carrying. how was i going to work in terms of dynamics around the possible reflation trade? jonathan: luke your thoughts on the subject? ofe: there has been a lot money flowing into etf's. the majority of it, much more than active money has been flowing and etf's. as a neck to fund manager i'm a little bit nervous about it and kind of a little bit happy about it. a lot of people will get very upset as we go through what is likely to be two or three o years of heavy volatility. it should be in active money and not impacted money. i wish i didn't have to learn that lesson, but that is what

they will have to go through. jonathan: luke is talking about a period of volatility. i'm looking at 2018. how can we predict anything we don't know who is running the federal reserve? there are a short list of names. coen., walsh, is this a market ready for anyone in those individuals? george: with chairwoman yellen we would of continuity. even powell would be viewed as a yellen proxy. hor the others we think wars would not necessarily be volatile by nature, but introducing new ideas around policy and how you interpret data. is the use around the balance sheet was a big sticking issue nyt actually resigned. -- and the reason he actually resigned.

it does introduce volatility. jonathan: yes or no, if warsh has been nominated as fed chair, is that a fowl for treasuries? oksana: treasuries will probably move up. there is a lot of conversation about which one will get the nod. it was most aligned with the administration's growth goals and deregulation agenda? i think kevin warsh has a strong case. i think is a pretty strong case in a particular realm. are the markets pricing that in? not likely at this point. jonathan: oksana staying with us fromgeorge and luke aberdeen standard investments. the auction block. the country very much needed to get away from its bond offering this week. the results are next. this is bloomberg. ♪

♪ jonathan: on jonathan ferro. this is bloomberg "real yield." they start with corporate and focus on a little bit more in energy. an offering from transocean energy. energy companies are returning to credit markets at the fastest pace in three years, with bankruptcies falling and companies facing more than $70 billion of debt maturing in 2019. salehabi's $10 billion following saudi arabia's $12.5 billion issue last week. it was a record $89 billion this year. the big headliner was in spain.

a sale of 3.2 billion, up 53 basis points. for the double on last month's spanish sales of similar debt. sending it to the highest level of interest in this maturity for months. oksana aronoff and george kumquat us that luke hickmore joins us as well. european politics is reasserting itself. this time it is spain and madrid and a divide opening up. does that stay a spain story or does it cleans through the rest of the periphery? luke: i think it is a spain story. , greece, italy, and portugal. if catalonia continues to cause problems, we have an italian election early next year.

that may spill over into that as well. right now, right here it is all about catalonia and spain. jonathan: this is what he had to say on the spanish block. >> away from this piece of news, spanish growth and employment data is arguably the best in europe. now you have a window that you can buy it a little cheaper. jonathan: are you a buyer? oksana: not a buyer. i'm astounded we still have spanish debt paying out. comment support the fact that growth continues to accelerate, bonds should be reflecting that in terms of pricing and growth, etc. here is the power of artificial price setting by central banks. that is what they are capable of doing, keeping a lid on interest rate levels. jonathan: if you look at spreads

so far over the last 12 months, italy has blown out a lot wider than spain has. the basis point move over the years in terms of spread. italy has flown up 40 basis points. change over the last 12 months compared to spain. luke, whether italy is the real story and spain is just kind of the appetizer to what might be coming out of europe in the next 12 months. luke: i'm afraid it's a bigger story than that. credit markets. do you really want to take a lot more risk in a market that is getting more and more asymmetrical? the downside is getting bigger and bigger. when you think about spain and italy and the peripheral markets, you are loading up risk. that is not somewhere i want to be. i want to be in companies i can understand where they are going. that means you are cautious about spanish companies all of a sudden, cautious about italian companies.

george, if you're over in frankfurt and you are mario draghi, what are you thinking about was happening in spain? george: you are thinking obviously there is a heavy force in markets. i think there is definitely -- i think we have fallen into this trap of relative value comparisons. your chart showing a spread change, for the overall levels are low. he should be wanting to see rates rise for the right reasons. oksana: we are sitting here with u.s. cash about the hit 1.5%. white is anyone want to buy spain at 1.7%? again, it is the power of artificial price setting by the ecb. that is requested that the man is coming from. jonathan: a difficult will be

for the ecb to pull out? but for can we do not have ecb qe? the kind of move could we have seen? how difficult to take a step back? oksana: for the ecb to take a step back? they will react to the economic picture on the ground. spain has been one of the stronger areas. if the fed continues on their trajectory it will give the ecb some cover. they have made comments that they are headed in that direction. jonathan: options are on the table for the european central bank has a change their quantitative easing policies. they seem to be two options they are debating. one is you can drop qe by 20 billion and extend for a shorter duration of time. for you can drop by a lot more and extend duration by a lot more. qe can run longer that a smaller rate, for running bigger right and have qe run shorter.

do you think the weight of interest from the governing council might be to extend it as long as possible? be.: yeah, it has got to i would say we have italy coming up and we have austria still bubbling away. we have not got a fully formed government in the netherlands. mario draghi would take his time right at this moment, but that does not mean he would not accelerate later. there is nothing wrong with him getting into next year when things may have called down and accelerated. i tend to agree. take longer now, be cautious. don't get involved in every new issue. that makes a massive difference. jonathan: for a lot of people it is scary. oksana, george, and luke hickmore. we want to get a market check on treasuries.

yields grinding a little bit higher. of two basis points on the two-year. up three on a 30-year as well. still ahead, the final spread. u.s. bank earnings and details on their fixed income trading groups. this is bloomberg "real yield." ♪

♪ jonathan: this is "bloomberg real yield." let's give you an update on next week. coming up, we wait to see what will happen with the parliament on monday. we will have minutes from the fomc. bank earnings and use economic data, including cpi and retail sales. the president donald trump may give a speech regarding his decision on the iranian nuclear deal. the united states made waves in the bond market when he said

puerto rico's -- should be wiped out -- debt should be wiped out. i can put the general obligation bond of puerto rico on the screen and you can see the the damage this comments did to my bond that is an absolutely battered. we dropped into the low 30's. we trade at about $.38 on the dollar. conversationugly with his death, the recovery rate. have you look at a situation in puerto rico and work out the recovery rate of a bond like that? george: we don't really look at the -- that side of things, other is concerns around recoveries. as much as is true for the situation, but in markets you are concerned about potential obligations and long-term liabilities. oksana: you have got people

leaving the region now. fact ishink about the usually supported by the taxing power of the local authorities, that power must be produced by the minute if you don't have people in the region. bringing it back to portfolios, puerto rico has been a favorite of high-yield investors for quite some time. we generally stayed away from very risky, high-yield areas of the market. the reason has been this is an interesting illustration. when you are in that part of the market you are dependent on a couple of lawyers for liquidity. -- players for liquidity. there is no liquidity in a position and that is the general problem with a high-yield market. jonathan: it was the first time since the inauguration larry summers agreed with the president. he said i agree with the president, the debt needs to be wiped out.

some reporting of bloomberg. a population the size of connecticut, the economy the size of the nebraska, with a bigger debt load for any state except for new york, california and massachusetts. how do you restructure the problems in puerto rico? luke? did with the you $73 billion in debt, have you deal with the $50 billion in pension deficit in the background. this will rumble on for a long time. 40% of these general obligation bonds are owned by you and me and people individually around the usa. i don't have any to be fair. the triple tax benefit is really attractive to people. who do you want to punish? it is not the big banks donald trump was talking about. it is the normal pensioners, the savers you will punish. i honestly don't know how you get out of it.

it does not feel like the u.s. treasury can take this obligation on. jonathan: we will wrap things up and get to the rapidfire round where we put together the last 25 minutes of the program and look ahead to the next week. one question, short answers. have we seen the 2017 lows for the 10 year yield? oksana: yes. george: yes. luke: yes. jonathan: next fed chair. figure one. oksana: warsh. george: warsh. luke: kevin warsh. jonathan: i am surprised at the consensus. this one will be fine and difficult. pick one of these. with aia for spain similar maturity. i will pick up 2020. the spread is about 300 basis points. which one do you hold through 2020? catalonia or spain?

oksana: not touching that one. george: i'm off-line on that one. jonathan: give me one. luke: you would have to go with spain. jonathan: we really appreciate your time. staying out of trouble alongside george and luke hickmore. from new york, that doesn't for us. we will see you next friday at 12:00 new york time, 5:00 p.m. in london. have a great weekend. this is "bloomberg real yield." ♪ is this a phone?

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shery: here are the top stories on the bloomberg and from around the world that we are following. 33,000 jobs. the recent hurricanes take their toll. average hourly earnings are at their highest levels since the great recession. we will break it all down with citigroup global markets fixed-income strategist. any bit of twitter diplomacy, puerto rico's governor and elon musk could possibly reboot they ravaged territory power grid. by the developers are turning to kkr her henry kravitz and blackrock ceo larry fink to give a welcome