♪ jonathan: from new york city, at jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: payrolls beat expectations, the wage growth leaves economists disappointed. bond issuance explodes for a record month as investors try to get ahead of a tax bill. wall street pushes back. the first junk-bond deal of december. we start with the big issue, payrolls delivered, wage growth disappoints. >> this is a solid report. the topline number is spot on.

the data is pretty solid. >> were starting to create jobs but not treating enough decent jobs. >> wages are a little weak. 2.5% is moving in the right direction. >> this is another example of positive real growth where inflation remains tepid. ofonce again the employment the populated rate went down with three percentage points below everywhere in 2008. that is why there is no wage growth. full employment is a long way away. there is lots of slack in the economy. >> i think there is some hidden labor out there. the participation rate is down significantly from where it was 4, 5, 6 years ago. we need to allow workers to keep more of what they earn, the more importantly we need to be able to drive more wages to our hard-working citizens of this country. we vary from you believe tax reform will drive to wage

growth. jonathan: joining me in new york is oksana aronov from j.p. morgan asset management, richard clarida at tempo, and colin robertson from northern trust asset management. rich, when will be break out of this story of decent momentum on payrolls for wage growth not doing much? richard: goldilocks has stated the party a long time. rates are low. that it is surprising on the out -- upside. you have to figure out the possible risk for the current scenario that we do get a pop in inflation of over the market expects. on that scenario, depending on how the fed reacts, to get some repricing. we are away from that. jonathan: no matter where it comes from, it informs the goldilocks story. growth is solid and stable, inflation is low and it doesn't

seem to be accelerating. do you see a shift anytime soon? oksana: there are a lot of factors stacked on one side of the boat. economic data is all around positive on every front, whether you look at china or the u.s. or europe. the one missing piece, if the investors are waiting for the piece for the fed to accelerate, i think that is a precarious position to be in to not be prepared for that. one thing central banks are focused on is asset inflation. jonathan: will this change? is a cold spring or something that will creep up slowly? colin: i think it will creep up slowly. i were concerned with the fact inflation could be less than the market might think or investors may believe. jonathan: what will get us there ? colin: i think it is a structural situation with inflation across the globe. if it is a situation where we continue to have employment report after employment report

groundhog day with inflation expectations but not coming to fruition, i think i'm more worried about the fed wanted to raise rates three times next year and inflation not supporting them. jonathan: will happen to the yield curve? it's been a big story once again this week. at one point it was going to test 50 basis points. what does this look like next year, this relentless flattening of the yield curve? can anything turn that around? richard: what i would say is i don't think the yield curve is all that much of a mystery. the slope is comparable to where it was in the last cycle. once you adjust for the decline of neutral rate. people talk about inverted curve. i start to worry, but i think of the fed gets the funds rate up and we get the data we are thinking we are likely to get, i don't see the curve inverting. you get an inversion if the fed overshoots neutral.

if we get a big overshoot in neutral, we will get an inversion. we will get an inversion. jonathan: if we can stick with this chart, it's an example of a the pressure of the yield curve is coming from. at the front end. down, look at that break 10's have not done a lot. but without look like next year? -- what will that look like next year? oksana: let's talk about the pressure on the 10's. people view the ecb as the easiest place in the world. that is creating demand. what you should not be doing is inferring on are telling us something we don't know that the stock market doesn't know. you have to be realistic. the only thing the bonds are telegraphing it is an artificially prized asset class. until the artificial demand is out of that part of the market

we should not be inferring anything about the forecasting powers. jonathan: the artificial demand is not coming out of the market anytime soon. -- peakit is going to be around the midpoint of next year. between now and then the market will have to reckon with that unless guidance changes dramatically. this is what -- the issue i have with the bond price rationalistas and the people coming up for reasons why bonds are priced rationally, clear steering get increased treasury supply because the fed balance sheet is shrinking and we have a fed chair coming in who's talking less about their we aren -- thei looking at strong economic growth and looking at central-bank concerns about we are looking at a late cycle fiscal stimulus. that is likely to go through.

what is that going today to the inflation expectations? jonathan: at the start of that comment it was about's treasury -- about treasury issuance. it could be frontloaded at the front and and less along the back end. of that put more pressure on what the yield curve looks like? richard: one big difference from the precrisis period is banks have the whole a lot of so-called high-quality liquid assets for regulatory purposes. the path of least resistance is the whole this excess reserves. as the fed drains those, there will be a demand for treasuries. some of that is essentially going to be absorbed under the current regime. deficits are projected to go up and it will be issuance hitting markets for the first time. the fed's balance sheet reduction plan, which they began at october, for the first year it's very bond market friendly. they are still buying treasuries and mortgages each month.

it is a year from now according to the current plan when it starts to roll off more rapidly. jonathan: we will probably call it the powell-draghi spread. two-year treasuries. earlier this week it was approaching 260 basis points. i keep asking the same thing again, and having a higher. how much oxygen is left up here? can we go much wider from where we are at? 250 something on to record your treasuries? colin: i think we can. we have a lot of things going on . i will bring up a chart if i can will quick. the world bond markets. you mentioned two-year. this is just in the data range on the right-hand side over the last three months. if you take a look, everything is virtually near the low for the three-month period. in the u.s. where we are seeing

pressure of the yield curve coming from the two-year side of the equation, in the u.s. that level is 181, at the high of the three-months. i think i think that will continue unless there is a change to the growth trajectory in europe, that this bracket actually widen further. jonathan: we have a question from a viewer. given the low supply dynamics, wounds are continuing to rally. how low can the 10-year bund yield go? oksana: the most overpriced asset classes the world, possibly beaten by bitcoin. jonathan: this is a bitcoin-free zone. oksana: in the short-term the technicals can do whatever it is they will do. over the medium to longer term, not the inflation data in europe -- nothing at the ecb geithner -- guidance's shall is to believe it has a rally here.

i'm looking at a much simpler and broader screen. you have $9 trillion in negative yielding securities of the world. this is officially an interesting point in time to be short and get paid for being short, which not other people present here are sitting at the terminals right now have experience doing or ever faced this kind of reality. there is a differentiated thinking about opportunities. jonathan: how do we address this right now? how will this change dramatically anytime soon? this is staggering. on the left side, on heard of. richard: your review my quick take. the u.s. two-year will continue to go up, not excessively but gradually under powell. the front end in eurozone is outcally tagged -- pegged to midpoint of 2019. you will have a transition. draghi's term is up in november of 2019. we can have him forever. there will be a post-draghi ecb.

at that point if the european economy is humming, the markets will start to romance a higher rate path in the eurozone. i think that is a 2019 story. for 2018, this chart can even be wider. jonathan: everyone is taking with me. oksana aronov, richard clarida and colin robertson. coming up, the auction block and potentially a record month for municipal bond issuance. and they are outperforming. this is "bloomberg real yield." ♪

♪ jonathan: from new york city, on

jonathan ferro. this is "bloomberg real yield." i want to head to the auction block. the tax discussion in washington reshapes the market. disabilities are working to sell tens of billions of dollars of securities before congress and ask legislation. it may take lives the record for the month setback in 1985. next year's issuance is projected to follow. sales are strong in junk bonds. they usually tale off after things giving. -- thanksgiving. it was doubled compared to last year. a little push back from investors. mcgraw-hill's $250 pay in kind sale was pulled. ,till with me, oksana aronov richard clarida and colin robertson. the market does have some standards. oksana: the market does have standards after all, although you would not know it.

i'm looking at a screen reader to the bottom line item. the double b rated utility issuer with a 1000 year maturity bond. jonathan: you told me about this and ahead and double check it. is that really 3017? oksana: a whopping 2% yield. that is the power of quantitative easing globally. i want to bring up another interesting contestant. -bis is a bond, they double maturing next year. -39 basisis yielding . points. -39 basis points. you,han: my question to is how does this make sense? why are we still in the high-yield market? planning for capital returns

enough for yield? colin: the first thing i would say as i never thought i would say this. i think i would buy bitcoin versus the 1000 year. i do think it makes sense. the central banks are going to reduce their accommodation slower than investors think. i look at the high-yield market right now, overall with an option adjusted spread around 350 basis points, over the next year they could give is a total return of 6%. i like the fact with respect to the picks, there is some discussion with the types of high-yield investors might buy. i think it is a positive market for the next 12 months. oksana: one thing to be aware of with respect to the high-yield market is it is structurally a different market than it was nine or 10 years ago, with etf's playing an enormous role. something like 4% to 5% of the market. you have very dramatic price discovery, prophecies or gaps up and down. that should form a much more

tactical approach to buying and selling. we were extremely positive on the high-yield space. in 2015 and 2016 with people hated us, i was on the record saying ccc's will outperform and they have. at this point in time, outside of some very selective pockets, we are really taking -- reducing our exposure significantly. jonathan: how are you reducing your allocations and high-yield? you take take notes. -- pick notes. on a total return basis, over the last year they outperformed all the high-yield. this year they have underperformed. you are not really being compensated on a total return basis to take the additional risk and go for the junkiest debt. this is story accelerate that you will not be compensated in the way you hoped you will be? oksana: whether you talk about

interest rate risk or credit risk, you are not compensated for taking on additional risk. this becomes a part of the cycle where security selection matters tremendously. again, it is very specific to certain pockets. probably you are not compensated. historicallyaging in the mid-three or four's. you are not compensated for the risks. selling it broadly and buying it selectively, looking for floating rate structures and where we can find them, although that market is no bargain as well. substitutere is a for optionality. that means owning credit on a hedge. it means having liquid structures you don't need to be selling one big buying opportunities come around. jonathan: we have had the mitts spread compression credit markets.

did forcing people to places maybe they would not like to go. as he get late in the cycle you think about late cycle behavior. i'm thinking more about illiquidity and where they may be should not be? richard: that has been the focus for several years. a lot of good news is priced in. we think investors in fixed income should have a keen eye on liquidity. use rallies and spread tightening to adjust the portfolios out of less liquid positions. when new money comes and have a higher fraction in cash, absolutely. jonathan: oksana aronov, richard clarida and colin robertson. we want to get a check in with the market has been this week. it was a little something like this. yields up at the front end by two basis points. of a single point and the u.s.-30 year -- u.s. 30-year. compared to the last few weeks, price action pretty muted.

of ahead, the final spread featuring rate decisions for the federal reserve, the ecb and the bank of england. that is next. this is "bloomberg real yield." ♪

♪ city,an: from new york i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up over the next week it will be pretty busy. bitcoin futures. we begin and end our conversation a bitcoin. you have talks in washington, three key central bank decisions and an eu summit. a brexit breakthrough came this week. a lot of things to look out for over the next week. run the table, oksana aronov, richard clarida and colin robertson.

rich, as you look across the three central bank decisions, if he had a focus on one, which is the most important? richard: the fed will do something. unless we get hit by a meteor, the fed will be hiking rates next week. even powell in his here he more or less said his desire to do that. it is fully priced in. we will have janet yellen's presumably last press conference. we will get a new edition. in terms of the ecb and the bank of england, draghi laid out the game plan. i think it will be little news of this meeting. the bank of england, no decision but we will see if there is any dissent. jonathan: do you just assumed the news conference is the same but with jay how will there instead of janet yellen? oksana: i think because everyone assumes that is going to be the case, right? that powell will be a continuation of yellen. i think that it happened very quickly, or she will step down as soon as he is approved.

very likely he will be at the january meeting. he may be viewed as a dove and a continuation of yellen, but he is very outspoken on deregulation. second have some ramifications for the market that are not necessarily being priced in right now. jonathan: yellen 2.0 for different this time? colin: i think it is 2.0. some decisions could be different. the fact powell came in and was very similar in conversation with respect to how yellen spoke to the markets, no change or shift with the expectation that has been sent out that they would like to raise rates three times next year, i think that is basically how the first quarter will look. i think the real issue for me and where we can have something with respect to the market that could change the course of the fed, as we talked about yields today, that the 10-year rate continues to contract, powell will have a real issue staying

to the markets if they want to raise rates three times in 2018. jonathan: shelley wrapup the program -- time for the rapid fire around. a series of quick questions every keep the answers really short. first question, as we going to 2018 and everyone looks at a flattening treasury yield curve will be get an inversion at some point next year on the treasury curve? yes or no? oksana: no. richard: no. colin: no. oksana: boring. jonathan: credit and high-yield. takes or broader high-yield? year, total return, which will get the most outperformance? butna: broader high-yield, be selective. richard: agreed. colin: broader high-yield. jonathan: looking to next week with the central banks on deck,

put the fed a one-sided think about this. who hikes next, the ecb or the boe? oksana: the boe. richard: the boe. colin: ecb. jonathan: there we go. oksana aronov, thank you very much to richard clarida and colin robertson. mco thecourse, pi official sponsor of "bloomberg real yield." the will see you next friday at 12:30 new york time. this is "bloomberg real yield." this is bloomberg tv. ♪

david: from bloomberg's world headquarters, i'm david westin. shery: welcome to bloomberg markets: balance of power. david: here are the top stories

we're watching at this hour. kicking the can down the road. congress puts off any cut questions on the budget until just before christmas. getting the tax bill on the president's desk for the holidays. getting the full employment. the u.s. as another 228,000 jobs in november think you see unemployment rate at 4.1% and gross ranges to tens of 1%. where is the range -- 2/10 of 1%t? the eu could have more talks the critical issues of transition and trade. we will look into the next that's right it. -- steps for brexit. ♪ shery: after passing the senate last night, the short-term spending deal to fund the federal government