jonathan: from new york for our viewers realize, -- worldwide 30 , minutes dedicated to fixed income. this is bloomberg "real yield." ♪ jonathan: coming up, a whether impaired jobs report shows payrolls falling and wage growth surge. the short list for the next fed chair reaches the president's desk. warsh, yellen, cohen, and powell are all in the running. the divide between madrid and barcelona continues to grow, sending spanish funds lower and much lower. we begin with a big issue, wage growth surging. stan on the fed's next move. >> 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, you are looking at the the unemployment number, which is the bright news here. >> janet yellen said in a healthy labor market wage growth is between 3% and 4%. we are just about there. >> as long as wages begin to rise towards 3%, they certainly are. i think the fed is a slamdunk in terms of raising rates in december. >> this confirms a story that has been permeating the market. the data is strong enough and the fed has said they will tighten, therefore december is pretty much in the bag. >> i think people will rightly interpret that the fed can move. they will go in december. two and three times next year. jonathan: joining us is oksana, from j.p. morgan asset management. head of american fixed-income strategies. plus coming to us from edinburgh, senior investment

manager at aberdeen standard investments. i want to begin with payroll report. just whip through the estimates in the numbers themselves. the estimate was 80,000. the number was -33. the unemployment rate grind it lower, 4.2%, but wage growth came in hot. 0.5% month on month. almost three percentage points on the year on your figure. -- year on year figure. george, it was a whether weather-impaired jobs report. we expected a headline number but there was excitement around wage growth. george: there is a slight impact from the weather. there were also some calendar quirks boosting the number but 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, wage pressures and general inflation is running higher the fixed income market , will get more defensive. jonathan: interested in a reaction in the market.

treasury yields by four or five -- treasury yields higher by four or five basis points. we reversed that move. oksana what you make of the , intraday activity around the jobs number itself? oksana this is a strong jobs : number. the unemployment rate lowest in 16 years. underemployment rate lowest in 10 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. that is incessant. certainly treasuries at 2.4, that became an interesting buying opportunity for some participants out there. but the question is what is the pace at which the fed will move? the next move towards the end of the year seems to be in the back g at this point. what happens after that? can this structurally untested market, which we will hopefully talk about more later really , handle that? jonathan: let's talk about why the markets stopped trading on the wage growth figure. they got excited for about five minutes, and then the number dropped. >> i think it's maybe to do with

the fact we saw it with the adp yesterday. the employment growth is still going on in the u.s., and everyone knows the payroll difficulties versus the household difficulties. so we get a bit of volatility around the number. everybody sits back and think s about it and we get back to normal again. yields will go higher over the long term, but for now i think people will digest the weather report we had. jonathan: it is the weather report and not the jobs report. that is the take away for so many people. i want to get to the positioning story. you didand jpmorgan 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 on this because , you hear and read a lot about the short positions being supposedly the largest in a multiyear period. but let's debunk the myth here. where is all the money?

it is in traditional, purely interest rate driven risk. trillions of dollars on that side of the boat as yields continue to come down. people are getting paid less and less o for that risk, but they 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 sheets and what yields have done over the last 8, 9, 10 years is an almost one-for-one relationship. the idea that these are these enormous buyers that will provide demand for when rates do start to firm up on top of normalization, i don't think it will hold up. jonathan: looking to with what is happening with the nominal ten-year treasury yield, what has not been happening with and what has not been happening with the term premium. george: as they described, it is kind of holding.

it is anchoring down lower than fundamentals. you look at the 10-year rates, they typically track term premium. there has been a disconnect here. the fed is also raising short-term rates. rates are rising overall. we think that as the fed's balance sheet unwinds and ecb tapers, it will go away. jonathan: concentration. you touched on it. i will allow you to elaborate. how much of a problem there may well 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. because in the retail market, for example -- not only in the retail market, you do achieve it through ecs. they are meant to be liquid, but in the case of fixed income it's tied to an inherently illiquid instruments, a bond. when you look at the largest etf's across all the sectors, the general aggregate, corporate, high yield, you have etf's with 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 , for example account for more , than double the inventory the street is currently carrying. how is that going to work in terms of the dynamics around the possible reflation trade? jonathan: luke, your thoughts on the subject? luke: look there has been a lot , of money flowing into etf's. if you look at the fund for lows -- fund flows the majority of , it, much more than active money has been flowing and etf's. as an active 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 years of quite heavy volatility in yields and credit spreads as well. it actually should be in active money, and not passive money. i wish i didn't have to learn that lesson, but that is what they will have to go through.

jonathan: just thinking about the next couple of years -- 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? we know the president has a short list, and it goes something like yellen, walsh, cohen, powell, and you can throw in taylor as well. is this a market ready for anyone in those individuals? george: with chairwoman yellen so thed have continuity, markets could prepare for that. and even to some extent powell , would be viewed as a yellen proxy. two, we thinkher kevin warsh would not necessarily be volatile by nature, but introducing new ideas around policy and how you interpret data. his views around the balance big stickingwas a issue on why he actually resigned, so this crucial

balance sheet and unwind would have to go faster because inflation would go up, so it does introduce volatility. jonathan: yes or no, if warsh has been nominated as fed chair, is that a foul on treasuries? oksana: treasuries will probably move up. there will be volatility. i would just add there is a lot of conversation about which one will get the nod. i think if you look at it from the standpoint of who is most aligned with the administration's growth goals and deregulation agenda? i think kevin warsh has a strong case. jonathan: you think he does? oksana: 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 and george and luke from aberdeen standard investments. up next on this program the , auction block. the potential in spain the , country very much needed to get away from its bond offering this week. the results are next. this is bloomberg. ♪

♪ jonathan: i"m jonathan ferro. this is "bloomberg: real yield." i want to head with the auction block now, where we start with corporate's and focus on a little bit more in energy. thanks to an offering this week energiessocean an and others energy companies are , returning to credit markets at the fastest pace in three years, with bankruptcies falling and oil stabilizing, and companies facing more than $70 billion of debt maturing in 2019. in sovereigns abu dhabi's $10 , billion sale following saudi arabia's $12.5 billion issue last week. the borrowing binge pushes sales from the middle east and north africa to a record $89 billion this year. and the big headliner of this

week was in spain. a sale of 3.2 billion, up 53 basis points. more than double that on last month's spanish sales of similar debt. sending demand to the highest level of interest in this maturity for months. come -- still with us oksana aronov and george kumquat and luke hickmore joins us as well. european politics is reasserting itself. this time it is spain and madrid and a divide opening up. i'm trying to gauge if that stays a spain story or does it through the rest of the periphery? luke: i think it is a spain story. you can start reading -- the ps, as we used to call them greece, italy, and , portugal. if catalonia continues to cause problems, we have an italian election coming up probably early next year.

that may spill over into that as well. but right now, right here it is all about catalonia and spain. jonathan: i caught up with an analyst from blackrock earlier. 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. it has been hereto for the best story 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. nobody wanted the stuff in double digits five or six years ago. frankly, the comment support the -- supports the fact that growth continues to accelerate, bonds should be reflecting that in terms of pricing and growth, inflation, 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

throughout the year so far over the last 12 months, italy has blown out a lot wider than spain has. what you will see on the screen in a moment is the basis move point over the years in terms of spread. what you will see is that italy has blown out 40 basis points. that has changed -- that is change 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 months? luke: i'm afraid it's a bigger story than that. it is about credit markets, generally. do you really want to take a lot more risk in a market that is getting more and more asymmetric? the downside is getting bigger and bigger here. when you think about spain and italy and the peripheral market, generally 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. now that means you are cautious , about spanish companies all of a sudden, cautious about italian companies.

but that suits a more cautious style anyway. jonathan: george, if you're over the ecb hq in frankfurt and you are mario draghi, what are you thinking about was happening in spain? george: you are thinking across european rates, and obviously there has been a heavy force in markets. to her i think there is point, 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. if we are going to see growth -- he should be wanting to see rates rise for the right reasons. oksana: i would add one thing -- we are sitting here with u.s. cash about to hit 1.5%. why does anyone want to buy spain at 1.7%? i think, again, it is the power of artificial price setting by the ecb. that is where most of that demand is coming from, that the ecb put.

jonathan: how difficult will it be for the ecb to pull out? pretend that we do not have ecb qe over the last week or so. what kind of move could we have seen in the bond market? how difficult will it be to take a step back? oksana: for the ecb to take a step back? they will react to the economic picture on the ground. that continues to strengthen in europe and specifically, spain. spain has been one of the stronger areas. so if the fed continues on their trajectory, that will give the ecb some cover. they have made comments that are very clear that they are headed in that direction. jonathan: luke, what options are on the table for the european bank as they change their quantitive 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. so qe can run longer that a smaller rate, for running bigger -- or run at a bigger rate and

have qe run shorter. given the politics do you think , the weight of interest from the governing council might be to extend it as long as possible? luke: yeah, it has got to be. i would say we have italy coming up and we have austria still bubbling away. we have not even got a fully formed government in the netherlands yet. so i would think mario draghi would take his time right at this moment, but that does not mean he would not accelerate later. this is not a single, to option game. there is nothing wrong with him getting into next year when things may have calm down -- calmed down or 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. everyone is sticking with us. we want to get a market check on

where treasuries have been this week. 2, 10, and yields grinding a 30. little bit higher. up basis points on the two-year. two up three on a 30-year as well. still ahead, the final spread. the big week ahead, featuring u.s. bank earnings and details on their fixed income trading groups. that is one thing to watch next week. yield.""bloomberg: real ♪

♪ jonathan: this is "bloomberg: real yield." i'm jonathan ferro. let's give you an update on next week. coming up over the next week we , wait to see what will happen in catalan with the parliament on monday. we will have minutes from the -- isn see, -- 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 president of the united

states, of course made waves in , the bond market when he said puerto rico's 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 those comments did to a bond, that has already been absolutely battered. we dropped into the low 30's, i believe we trade at about $.38 on the dollar. having thisre now ugly conversation about this that, as we have been for a debt, 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 that side of things, other is -- but there is concerns around recoveries. as much as is true for the but in general across the markets people are concerned about potential obligations and long-term liabilities.

oksana: you have got people leaving the region now. if you think about a geo, and about the fact is usually supported by the taxing power of the local authorities, that taxing power must be getting reduced by the minute if you don't have people in the region. but bringing it back to portfolios, puerto rico has been a favorite of high-yield investors for quite some time. what we have said -- we generally stay 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 players for liquidity. this is an extreme variation on this, in where there is no liquidity in a position and that is the general problem with a high-yield market. jonathan: in terms of wiping out the debt 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. , i want to think about how are you are -- luke, i want to think

about how you are thinking about the situation right now. 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. it is a tough, tough situation. how do you address it? how do you restructure the problems in puerto rico? luke: even if you did with the -- deal with the $73 billion in debt, have you deal with the $50 billion in pension deficit in the background as well? 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 haven't got any to be fair. , the triple tax benefit is really attractive to people. so who do you want to punish? it is not the big banks donald trump was talking about. it is your normal pensioners, the savers you will punish. so it is an intractable position. 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: it does not look like it at all. 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 as well. one question, short answers. have we seen the 2017 lows for the 10 year yield, yes or no? oksana: yes. george: yes. luke: yes. jonathan: there we go. next fed chair, pick one. , cohen, or powell. oksana: warsh. george: warsh. luke: kevin warsh. jonathan: i am surprised at the consensus around kevin warsh here. this one will be fun and difficult, because you have to pick one of these. catalonia or spain with a similar maturity. i will pick out 2020. the spread is about 300 basis points. which one do you hold through 2020? catalonia or spain?

oksana: not touching that one. [laughter] george: i'm off-line on that one, too. jonathan: luke, you have to give me one. luke: you would have to go with spain. jonathan: there we go we really , appreciate your time. oksana staying out of trouble alongside george and luke pick more at aberdeen standard investments. new york, that does it for us. we will see you next friday at 12:00 new york time, 5:00 p.m. in london. until next time, have a great weekend. this is "bloomberg: real yield." ♪

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