>> from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is bloomberg "real yield." ♪ jonathan: no real change of the fed, why the new boss sounds like the old boss. the prospect of tax cuts. political risk and keeps the bids in check. and a wall of demand meets a flow of supply. $46 billion in orders. we begin with a big issue, why

the new boss sounds like the old one. >> the labor market and economy are not significantly overheated. >> there is no sense of an overheating economy or a tight labor market. >> wage increases are modest. >> we don't see wages signaling tightness. >> it has been below the 2% objective the last 2-5 years. >> is a transitory or are there more fundamental things that work? i think were watching carefully to see. >> we think it is important to gradually move our policy rate to a neutral level. >> the economy is strong, unemployment is low, growth is strong, it appears to have picked up. it is time to be normalizing interest rates. jonathan: joining me is cohead of global portfolio management at goldman sachs asset management. and coming to us from london,

fixed income portfolio manager at j.p. morgan asset management. it is great to have you guys with us. i want to begin with you, what will change at the fed given the two individuals sound precisely the same? >> not a lot, but i think over time there are subtle differences.

first on the similar side, i think they're both consensus builders. i do think you're not going to see anything extreme out of powell, but they are subtle differences. number one, powell is more focused on markets and will listen to markets. i think if you continue to see an equity market that continues to run the way it is run, i think he will do it as a signal of overheating. i think on the margin come he may be hawkish in that regard. the second is regulation. chair yellen was focused on conservative approach toward the banking system and the regulation in the obama administration was constraining for a lot of banks. i think powell will be more practical and that will potentially lead to more lending. eric: diana, those things that might put on the table, is that enough to stop us out of what we are currently seeing? >> i don't think it will be a significant destabilizing for markets. ultimately we have an environment where groups are well anchored, there's a lot more certainty. for long-term investors, it is a good situation. we know the fed will gradually hiking rates and powell is sending the same message. for smaller banks, he has approached regulations saying this is an opportunity for a more tailored approach. he is supportive for this institution. for investors on fixed income and credit, this is a positive outcome. eric: robert, for the treasury market, it has been a flat yield curve, as might be anchored and inflation is still soft, the fed is still moving. bearish the front end and bullish the long end seems to be the story. >> i think there's less room for the bullish the long end part. looking in the last year, there's been very little movement in long-term yields. that is going to be the case

going forward. the front has full of quite a bit, but there are differences compared to a year ago. the first is they have hiked, basically once they get done with december, 100 basis points. and inflation is measured by the core, it has come down from a 1/8 to one fourth. you're not sure what it will do. they are expecting it to go up. the economy is doing fine. you keep chipping away at it, i think there will be increasing friction surrounding these hikes the closer they get to 2%. eric: mike? >> i don't think this will be a goldilocks scenario for bonds, whether it is fixed income generally in terms of treasuries or credit. i think 2018 will be a challenging year. jonathan: what changes?

>> i don't think the differences who is the chair said. the difference is fundamentals. we have been in this one way cycle of easy money and low inflation and modest level of growth differentials across countries and very little volatility. we think in 2018 the picture changes. what changes it? i think there will be a normalization of a risk premium over all. when you start to see central banks remove this accommodation, the u.s. is started, the ecb is starting, there is talk of potential changes in japan, it changes the game. when you look at the yield curve right now, everyone is talking about it will flatten invert, it would only invert if we thought we would have a recession in the u.s., or a high probability. there is a very low probability. the opposite is happening. there are animal spirits released in the economy right now. we think it will introduce a a steepener.

some interesting things to look at, one is the yield curve and what is happened recently in the yield curve, you have seen it significant flattening, some people calling for an version, we are not calling for that. look at the tips market. tips are seeing some level, this is the one above where you start to see inflation getting priced back in. what we think is going to happen is with the strong economy, with physical stimulus right now, we think you will see inflation not get up to 2% or 2.5% next year, but to the point where you will see rates rise and curve steepening. jonathan: diana, what you say to that? we could get a big change in the regime year. diana: i think next year will still be a positive outlook for growth but i agree with mike's sentiment on duration. i think the outlook on duration is less clear-cut next year, partially because of the normalization he is talking about in absolute rate levels. that said, we have to take a broader global look when you're thinking about what is happening. there is a huge demand coming in from the rest of the world or risk assets. that will not change overnight or in the next few months, we think it will be a story that

plays out for longer while the ecb is stepping back. they're not talking about rate hikes. you still have a huge output cap in europe. it is coming from an elevated position. the same story out of japan. jonathan: robert, for you, you have been sailing the inflation story throughout 2017. will it change for you in 2018? robert: yes and no. you cannot paint it with that

broad of a brush. what has worked for us to is being short the front end in the u.s. being long on the backend, but especially short on the front end. as we go through the ecb taper, we will have to see if there are opportunities for trades in europe. i think it could be too early to get cautious. the fed in contrast to the earlier cycles is much more careful on raising rates, a much slower pace. we are a ways away from target. bank of japan, they printed cpi last night, euro is on core inflation 1.1%. the euro is a shooting up, that will forestall aggressive reduction of accommodation from europe. their interest rates have not even risen over the last several month to a year, even as they are tapering. i think there is a super low, long rate environment that will anchor our backend here and will be very positive for risk markets. jonathan: robert is here from ptm and diana. coming up next, alibaba holds the biggest corporate offering 2017. that is next. this is bloomberg "real yield." ♪

♪ jonathan: i want to head to the auction block, we start in the united states with the treasury, the sale with a yield of 2.3%, a ratio the lowest since february of 2016. missed by the lowest share in 16 months. in the u.k., the smart money went long. the university of oxford sold $1 billion of bonds due in 2017 with a yield of about 2.5%, maybe the first 100 year obligation to be sold by a debut issuer. the big highlight this week, alibaba has the biggest chinese offering of 2017, attracting $46 billion in orders, the longest portions of the order, 1.58 percentage points over comparable government debt.

from new york, mike from goldman sachs, robert and diana. what an offering, $46 billion of demand just comes in. the wall of demand meeting the flood of supplies. your thought on that? robert: i think the markets are open, there is a ton of liquidity. the craziest manifestation of that is bitcoin. but there is a spectacular amount of money in places where the rates are incredibly low, whether it is japan, coming out of china, coming out of korea, the rates are very low, there's not a lot of product. the dollar markets are open, a wide range of products. the spread, given where we are in the cycle, i'm not sure we will have some kind of event, they are more than adequate. jonathan: was it the fact that it is the chinese come of the fact it is a tech company or just that it is a single-a

issuer with a better yield? michael: i think it is the latter. i don't think it being a chinese company is attractive to too many people. there is an enormous amount of capital in asia. it is really earning nothing right now. we have concerns, particularly around china, even though you have a high-quality company that is issuing, maybe china continues to grow moderately over the next 1-3 years, their one-year debt or three-year debt might be fine, but lending for 30 or 40 years when there is a massive debt problem in the country, we have a significant challenge with. also the structure of some of these deals, there are questions about as a bondholder, your rights to the actual intellectual capital of the firm. we are not big fans and are significantly underweight on chinese credit. jonathan: but those concerns have not bled through to the alibaba issue, the have not let

through to other things. there's a bit of a rep taking place in chinese fit income. bit of a rout taking place in chinese fixed income. why is that happening? michael: we have a chart that goes over where we see opportunities and china is a bubble type of market from a credit perspective and many perspectives. it is not likely to end today. the government has significant reserves, but you have a debt problem that is likely going to come to roost over the next few years. if you look at emerging markets, emerging markets away from china, particularly economies that are not directly tied to chinese growth, which we think will decline significantly in the next few years, there is a huge rate differential, huge opportunity. you have very strong growth. you have significant adjustments occur in a number of economies, you are pretty early stages of recovery first is the u.s., -- versus the u.s., where we are in later stages. if you look at the differential

on the chart, there is a massive differential between developed market rates and emerging-market rates. one, we think will lead to potentially rates coming down in emerging markets. more importantly in the area we are exposed to, currencies. we think with stronger economic growth in the emerging markets x china, you will see appreciating currencies relative to developing market currencies. jonathan: diana, do you see a reason to stay in there with em? diana: yes, emerging markets look positive. obviously at this point in the cycle, you have to be careful. i think the last two years, we've seen some big recovery, but i think investors have to be a little more discerning now. look for the markets where you have higher yield rates, robust growth not too exposed to idiosyncratic shocks, and stronger balances. jonathan: a two-part start here with alibaba, one is em, and the

others is what is happening with credit more broadly. morgan stanley saying, it is not a coincidence that fundamental problems are becoming more apparent in the sector as the fed continues to withdraw liquidity, according to strategist. as is often the case, these risks are mistakingly being a rationalized as surely idiosyncratic problems. him him robert, this happened a few weeks ago when there was a little bit of a pullback in credit and people said no, this is about sprint and t-mobile, it has bled out a little, but really they are specific issues. what do you say about the drop in morgan stanley? robert: i think the drop in health is corollary. i think you see it in equities, you see it in credit to some degree at any given time, there is some area getting bombed out, whether it is retail, energy, looking back ways. and in emerging markets, some of the sovereigns were in tough shape.

him him 6-12 months ago, looking even in brazil and argentina. i agree, you need to be selective in emerging markets. i think sovereigns and general look attractive relative to corporate, whether you are looking at european peripherals, emerging markets. on the corporate side in emerging markets, we tend to buy on a shorter maturity because of difficulty in assessing the credits long-term prospects. jonathan: i am trying to understand what getting defensive in credit means this time around. what going up in quality means this time around. if you look at what is happened in the last couple of years in credit, leverage has been picking up across most ratings, with maybe the exception of the very top, say single-a and elsewhere. what is your view on what going defensive means? michael: i think alibaba is a good example to talk about. if you wanted to get more defensive and go up in quality, you buy a high-quality, pristine company, but that doesn't change the fact that alibaba will be exposed to china risk and credit

risk overall. i don't think the answer is to go up in quality, i think the answer to getting more defensive is to have a relatively neutral position in portfolios, even moving toward potentially somewhat underweight. i know this is an idiosyncratic argument, and when it becomes systemic is an interesting one. my grandmother used to teach me if you have a series of five pennies, and become cynical, and so on. eventually it matters. i don't think we are quite there yet, but there are a number of industries that have been hit with significant issues and the bottom line is the risk is higher. this is why volatility matters to credit investing. the higher the volatility, whether it is equity volatility or rate volatility, the more you need to get compensated for this. you want to make sure you get compensated for the valuation issue. jonathan: is it time to be

defensive? we have talked about this before, try to express that more clearly, where you would go. michael: yes is the answer, very modestly. not to completely remove spread exposure in portfolio. what we have been doing in portfolios, we have started to underweight high-yield investment and we have bought securitized assets we think offer an attractive carry, they have a positive correlation to credit, but they are better protected in the event we see credit events in the corporate sector. that's will we have been doing, things like clo's, and spreads that are more attractive. jonathan: robert, your thoughts? robert: to that, on the structure, i think that is a defensive product, good spread, i agree with that. on the cycle of volatility, i think what we've seen a historically is when the spreads begin to blowout is after the fed is further along in tightening and they break the system. right now and in prior cycles, there is a lot of anxiety that can kick in one, 2, 3 years too early. jonathan: everyone is sticking with me. i want to get a check on where the markets have been throughout the week, twos, tens and 30's. we finally broke out of the tight range on the 10 year. we cannot read quebec and again. front end up three, long and down one. coming up, a potential government shutdown and the jobs report. this is bloomberg "real yield."

♪

♪ jonathan: this is bloomberg "real yield." i'm jonathan ferro.

it is time now for the final spread. in the next week, canada's prime minister travels to china to meet with the chinese president. in the u k, the prime minister theresa may is scheduled to meet with the e.u.'s chief brexit negotiator. michel barnier. germany will have a social party convention. they hold coalition talks with angela merkel. in the u.s., a potential government shutdown as well as the u.s. jobs report. still with me, michael, robert and diana. diana, let's begin with you. looking forward to next week, payroll is friday. best case? diana: i expect we will see pretty much 200,000 new jobs added. employment rate steady. about 4%.nt rate at nothing really that will derail the market too much. jonathan: we talked about breaking out of the goldilocks regime. any reason to believe

unemployment rate will go lower and wage growth will start to squeeze in a material way? michael: we have been right on the unemployment rate continuing to decline, but it has been challenging to predict the wage side. we think we will continue to see the unemployment rate declined. we expect to see probably be a couple tenths taken off next year. something like that. we expect to see, where we are in terms of tightness in the labor market and the amount of hiring we are talking about, it is likely to lead to some level of inflation. the bottom line is it doesn't have to be out of control to get rates to start to price it in even if the fed is not as aggressive. jonathan: do you anticipate a conversation with us next year, where i say to you, unemployment is really low, the data is terrific, why are treasury yields still at 240? michael: it is possible but i would bet you lunch we will not have that conversation. jonathan: would you take that bet, robert? robert: i would take the other side. jonathan: would you, why? robert: wages are rising, they are about the level they have been at in past sessions.

i think this is an instance of fighting the last war. the last war in the 1970's of breakaway inflation, a totally different environment. it was very contained. i think japan is a good example of a place where the 2.8% unemployment rate, they are not producing inflation. jonathan: i have to book a table for 2018. diana, we can invite you, as well. time for the rapidfire round. three quick questions and three quick answers. payrolls report, 200,000 is the median estimate is a bloomberg survey. upside or downside? michael: upside. robert: modest downside. diana: upside. jonathan: goldilocks or the start of a new regime? michael: new regime. robert: goldilocks. diana: goldilocks. jonathan: to keep you all out of trouble, this is your personal

view, would you hold bitcoin or the 30 year alibaba issue through the end of 2018? michael: alibaba. robert: alibaba. diana: alibaba. jonathan: there we go. i guess that is sensible. for you guys at least. michael, robert and diana from j.p. morgan asset manager. guys, i appreciate your time. from new york, that does it for us, we will see you next friday at 12:30 p.m. new york time. 5:30 p.m. in london. this is "real yield," and this is bloomberg. ♪

♪ david: did you ever think one day you would be the chairman of the joint chiefs? >> it was beyond any possible level of the aspiration. david: people said this man should be president of the united states. >> it never occurred to me. why? you said that was that important, why doesn't the president call me? >> i get a call, hello, general powell? this is ronald reagan. >> would you fix your tie, please? david: well, people wouldn't recognize me if my tie was fixed, but ok. just leave it this way. alright. ♪