>> from new york city, this is "bloomberg real yield." ♪ jonathan coming up, no real : change in the fed, why the new boss looks like the old boss. the prospect of tax cuts does not shake bonds. and a wall of demands meets a flood of supply. alibaba debt attracts $46 billion in orders. we begin with a big issue. why the new boss sounds a whole lot like the old one. >> the labor market and the economy are not significant, we

overheated. no sense of it overheated economy or a tight labor market. >> wage increases are modest. >> we don't see wages having tightness. >> inflation has been below the 2% objective for most of the past five years. >> is it transitory or are there more fundamental things at work? we are watching carefully to see. >> we think it is important to gradually move our policy rate towards a neutral level. >> the economy are strong, unemployment is low, growth appears to have picked up. it is time for us to be normalizing interest rates. jonathan: joining me around the table in new york cohead of , global management for fixed income at global sacks. -- goldman sachs. the chief investment strategist of fixed income. coming to us from london is diana, fixed income portfolio

manager at j.p. morgan. what is going to change at the fed? mike: i think not a lot will change, but on the corporate side there are several differences. i think they are both consensus builders. i think you will not see anything extreme out of power, but there are subtle differences. number one, powell is more focused on markets. i think that if you continue to see equity market and continue to run, powell will do that as a -- will see that as a signal of overheating. the second thing is in regards of regulation. chair yellen was focused on reports towards the banking system and overall regulation under the obama administration was constraining for banks. i think powell will be a little bit more practical and that will potentially lead to more lending on the bank side. jonathan: the kind of things that mike put on the table, is that enough to take us out of

regime we see? diana: i don't think it will be as significant a stabilizer for markets. we have a -- environment where there is policy uncertainty. for long-term investors, that is a good situation. we know that the fed will be gradually hiking rates and powell has the same message. for smaller banks, his approach to regulation seems to be more tailored. incomeinvestors in fixed and credit, i think this is a very positive outcome. jonathan: for the treasury market so far it has just been a yield curve. growth might be anchored. inflation is still soft. bearish the front and an bullish the long end. >> i think there is less room for the bullish, the long and desk end part. -- end part. looking back at the last year there has been very little

movement in long-term yield. that will be the case going forward. the front-end has slid off a bit. the difference is now compared to year ago. the first one is, they have hiked on basically, once a get done here, 100 basis points. inflation is measured by the core pc that should come down from 18 to 14. you cannot be sure what it will do. they are expecting it to go up, they have asset markets high and the economy is doing fine. but keep chipping away at it and it will be increasing friction surrounding these heights the -- hikes the closer they get. michael: i actually do not think this will be a goldilocks scenario for bonds. whether for treasury or credit. 2018 will be a very challenging year. jonathan: what changes it? michael: i don't think the difference is who is the fed chairman, i think the difference is the fundamentals. we have been in this one wave cycle of easy money, low

inflation and a modest level of growth differentials across the -- countries and very little volatility. we think in 2018 the picture changes. i think there will be a normalization of risk premium over all. when you start to see central banks remove this accommodation, the u.s. is starting, the ecb is starting. it changes the game. when you look at the yield curve now, everyone talks about how it will invert. it would only invert if we thought that we would have a recession in the u.s. there is a very low probability to that. the animal spirits are released in the economy. we think that that will introduce a curve steeper. if you look at a couple of things that are interesting to look at, one is to take a look at the yield curve that happened recently. you have seen a significant flattening. some people calling for inversion. we are not. this is a line above where you

start to see inflation eating -- getting priced back in. what we think will happen is, with the strong economy, with fiscal stimulus right now, we actually think you will start to see inflation get up to it 2.5%, but you will see rates rise. jonathan: what you say back to that, that we get a big change in the regime next year? diana: i think next year will be a positive outlook for growth, but i agree with the sentiment on duration. the outlook for duration is likely to be less cut next year, partly because of the normalization he is talking about in absolute rate levels. that said, we have to take a broader global look. demand forill a huge the rest of the world for risk assets. that is not going to change overnight, or over the next few months. we think that will be a story that plays out for longer while

the ecb are stepping back, they are not talking about retakes -- rate hikes because we still have a huge output in europe that keeps closing but coming from an elevated position. same story off of japan. jonathan: for you you guys have , been -- the reflation story throughout 2017. will it change for you in 2018? robert: yes and no. you cannot paint it with that broad of a brush. for us, it was really worked for being in the u.s. being along the back and has also helped, the being short the front end. as we go through next year and the ecb table, we will have to stay tuned to see of there is opportunity for similar trades in europe. i think on the cycle and the risk premiums, it could be way too early to get cautious. the fed, in contrast to earlier cycles, is much more careful and raising rates are going at a slower pace. we are a ways away from target. bank of japan printed cpi last night.

energy at 0.2%. eurozone core inflation at 1.1%. euro is shooting up. that will forestall anything and reduction of accommodation from europe. their interest rates have really not even risen over the last several months to a year, even after. -- as they are tapering. i think there is a super low, long rate environment and that will anchor our backend. it will be positive for risk markets. jonathan: you are going to stay with me. mike from goldman sachs and diana from jpmorgan. coming up next, the auction block, alibaba host the biggest holds the biggest chinese corporate offering in this is 2017. "bloomberg real yield." ♪

♪ jonathan: this is "bloomberg real yield." i want to head to the auction block where we start in the united states with the treasury. a $28 billion salary. a yield of 2.3%. the bid to cover ratio since february 2016. indirect bidders buying the lowest share in 16 months. in the u.k. smart money went , long. the university of oxford sold $1 in bonds due in 2017 with a billion dollars yield a 2.5 percent. it may be the first 100 year obligation to be sold. the big highlight this week. alibaba, it held the biggest chinese offering of 2017, attracting $46 billion in orders, more than six times the deal size. the longest portions of the offering, 40 year bonds offering 1.58% over comparable government debt. still with me around the table, from new york is mike from goldman sachs.

and diana from jpmorgan. what an offering. $46 billion of demand just comes in. the wall of demand leading a flood of supply. your thoughts on the alibaba deal? >> i think the markets are open. there is a ton of liquidity. the craziest manifestation of that is, the 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 is not a lot of product. dollar markets are open, a wide range of products here. the spreads, given where we are in this cycle, we will have some kind of an event. jonathan: was at the fact that it was a single issuer with a better yield? michael: i think it is the latter.

i don't think that the fact that the chinese company is attracted to many people. there is an enormous amount of capital in asia that is really earning nothing right now. we have concerns. particularly around china. even though you have a very high quality company that is issuing, maybe china continues to grow modestly over the course of one to three years. their one year debt or three year debt might be fine. the idea of lending to a chinese company for 30 to 40 years when there is a massive debt problem in that country, we have a challenge with. also the structure with 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 we are pretty significantly underweight chinese credit. jonathan: the underweight

chinese credit haven't bled through to the alibaba issue. why is that happening? michael: we have a chart that goes over where we do see opportunities. china is a bubbly type of market from a credit perspective and from many different perspectives. it is not likely to end today. the government has significant reserves. you have a debt problem that is likely going to come to roost over the next three years. if you look at emerging markets away from china, particularly economies that are not directly tied to chinese growth. we think will decline to give them in the next couple of years. you have a huge rate differential, at a lot, strong growth, and you are in early stages in terms of recovery versus the u.s., where we are in later stages. if you look at the differential in the chart, you see there is a

massive differential between a emerging market rates. more importantly in the area we expect, we think with stronger economic growth in emerging art -- markets, we think you will see of appreciating currency relative to a lot of developing market currencies. jonathan: do you see a reason to stay in there with em? diana: yes. i agree with everything. emerging-market prospects of -- look positive. at this point in the cycle you have to be careful about where within emerging markets you are. the last two years we have seen a big recovery. now, investors have to be more concerning. these of the markets where you have high yield rates, robust growth and you have strong external balances. jonathan: a two-part story here with alibaba. one is em and the other is what is happening with credit. morgan stanley coming out effectively, many people said the following.

it is no cool incidents the fundamental problems are becoming more apparent in the sector as the fed continues to withdraw liquidity. as is often the case, these risks are mistakingly being rationalized as purely idiosyncratic problems. robert this happened a few weeks , ago when it was a little bit -- there was a pull back in credit and people said this is about sprint and t-mobile. what do you say back to morgan stanley? robert: i think the drop in correlation is healthy. you see credit to some degrees. -- in credit to some degrees. at any given time there is some area getting bombed out whether it is retail, energy, looking back a ways. and emerging markets some of the sovereigns were in tough shape. 6012 months ago. looking even at brazil and argentina. i agree, you need to be selective and emerging markets. sovereigns in general look

attractive relative to corporate's whether you're looking a european peripheral. on the corporate side and emerging markets, there is a shorter maturity because of the difficulty in assessing those credits long-term prospects. jonathan: do you know how many people have told me it is time to get defensive and credit? i am trying to understand what getting defensive in credit means. what going up in quality means. if you look at what has happened over the last couple of years in credit leverage has been , picking up across most ratings, with maybe the exception of the very top single-a's and elsewhere. what is your view on what going defensive actually means? michael: i think alibaba is a good example to talk about here. if you wanted to get more defensive and go up in quality you buy into a company like alibaba. that does not change the fact that alibaba will be exposed to china risk and credit risk. i don't think the answer is to go up in quality, i think the

answer is to have a relatively neutral position, even moving towards somewhat of a lower rate. i had in need use socratic argument -- and idiosyncratic argument and when it become systemic is an interesting one. my grandmother used to say if you have a nickel becomes a dime than a quarter. it kind of matters. i don't think we are quite there yet, but there are a number of industries that it been hit with significant issues. the risk is higher. which is why volatility matters to credit investing. the higher the volatility. the more you need to get, save for risk occurring. bp is a perfect example. it is a pristine company but stuff happens. you want to make sure you get compensated. jonathan: is a time to be defensive? mike, we talked about this before and trying to express that clearly as to where you would go. michael: yes is the answer, very modestly.

not to completely remove it in -- spread exposure in portfolios. we start to underweight high-yield investment. we bought security assets that we think offer very attractive carry. then a positive correlation to credit. they are better protected in the event we see events in the corporate sector. that is what we have been doing. asset-backed securities have been very secure. thoughts.robert, your robert: on the structure product, i think those are essential. i completely agree with that. on the volatility, i think what we have seen historically is that when the spread begins to blow out is after the fed is further along in tightening and they break the system. right now and put -- in prior cycles, there is a lot of anxiety. that would be my concern.

jonathan: everyone will stay 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 that tight range on the tenure and -- 10 year and came back in. 236 is how we trade on the u.s. 10 year, up by a basis point of three. the longest down one. 276 on a 30 year. still ahead, the final spread featuring a potential u.s. government shutdown and the jobs report. this is "bloomberg real yield." ♪

♪ jonathan: this is "bloomberg real yield." it is time now for the final spread coming over the next week. canadian prime minister travels to china to meet with the chinese president and in the

u.k., prime minister may is set to meet with the european commission president and the chief president -- chief brexit negotiator. coalition talks are held with angela merkel. and the united states you have a potential government shutdown as well as a u.s. jobs report. still with me, michael, robert and diana. looking for to next week. payrolls friday. what is your base case? diana: i expect we will see in line with the consensus about 200,000 new jobs being added in the employment rate steady at 4%. nothing really that will derail the markets too much, but signs that the economy is on a firm trend. jonathan: we talked about breaking out of that goldilocks regime in is there reason to 2018. believe unemployment rates will go lower and wage growth will squeeze down in a material way?

michael: we have been right on the unemployment rate continuing to decline. they will be challenging to predict the weight side -- wage side. we do think we will continue to see it decline and we expect to see probably a few tenths taken off next year, probably go down to 3.7%. , where wect to see are in terms of tightness in labor market and the amount of hiring we are talking about is likely to lead to some level of inflation. it doesn't have to be out of control to get rates. even if the fed doesn't act. jonathan: do you anticipate a conversation with you and i this say next year where i unemployment is really low, the , data elsewhere is terrific, why treasury yield is still around 240? michael: it is possible but i would bet you lunch that we will -- won't have that conversation. robert: i take the other side. i think that wages are rising, but they are up to the level

that they have been at during past sessions. i think this is an instance of fighting the last war. the last war in the 70's of breakaway inflation was a different environment. it was very contained. i think japan is a good example of a place with a 2.8 unemployment rate where they won't see inflation. jonathan: i have a table december 1 for 2018 for three. robert, martin myself. if you can make it over diana, you can come as well. it's time for the rapid fire round. let's begin with payrolls report. 200,000 with the meeting -- median estimate of the bloomberg survey. upside of downside? michael: upside. robert: modest downside. diana: upside. jonathan: goldilocks saw the up -- start of a new regime. goldilocks of the start of a new regime? michael: regime. robert: goldilocks. diana: goldilocks. jonathan: this is your personal

view. would you hold bitcoin or the 30-year-old alibaba issue through 2018? michael: alibaba. robert: alibaba. diana: alibaba. jonathan: there we go. i guess that is sensible for you guys. mike from goldman sachs asset management, diana from j.p. morgan asset management. i appreciate your time. that is it for us. we will see you next friday at 12:30 p.m. time -- p.m. new york time. this is bloomberg. ♪

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