jonathan: from new york city to our viewers worldwide, i'm jonathan ferro, with 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ jonathan: coming up, u.s. payrolls disappoint, wage growth stalls, and unemployment sticks at 4.1%. analysts say one week of an expected jobs report is unlikely to derail the federal reserve. the economic data in europe looks hot, but inflation calls. we begin with a big issue, the payrolls report. >> it isn't bad. i wouldn't overreact to this report. >> growth in the jobs market is solid. >> disappointing in many ways. >> a .3% increase in wage

growth. you have to look at the rounding the last 12 months and we could still be a path of up to 3% so that would be a sign of improvement in the job market. >> the job creation is fine. it's the wages, was .3 with the revision down to .1 so a .2% per month. that's what were really looking appeared if you can get wages going, you can get inflation going, which is what the fed wants to get going. >> i do think you are seeing both pretty solid labor market that's not necessarily extremely overheating, but it's a good thing for markets and equities. >> this is not a labor market humming along. it is certainly not consistent with needing to raise rates. and i think it pushes the fed possibility of raising back. this is a labor market that potentially looks like it's beginning to slow. >> the labor market is actually really hot, but the run rate for job growth is below 100,000 probably, so anything above that to me is taking away the slack

in the labor market. >> the labor market is not hot. it's not humming. it's slowing and relatively weak. >> as the economy continues to grow, and as the labor force continues to tighten, remember the unemployment rate is still 4.1%, a 17 year low. we are going to see real wage pressure here. jonathan: joining around the table is michael clark, kathy jones, and christian mahmani. kathy, hot or cold? do you want to jump up to the debate and help us out? kathy: it's solid and you only need to create 100,000 or less jobs to keep diminishing the slack in the labor market. so it is warm. there was some good news and the prime age of workers is moving higher and it's well above where it's been the last five or six

years, so that means people are coming back to the labor market and things are moving along. krishna: even from markets perspective if it's classified as not so hot, it doesn't matter. there is enough momentum in the economy and the tax cuts are coming so on the back of it, the markets will see through. that's what they are doing. after the initial dip, yields a backup you'd -- are back up. at the end of the day, the economies on a global races are doing well. jonathan: michael, your thoughts? michael: i'm in line with krishna. the biggest news is you can see a change in the sentiment of the market. a year ago everyone would've been looking for the worst-case scenario out of every report. jonathan: or at least for the fed not to do something. michael: where now we move for five minutes and the markets go right back to where it was. people are much more able to look beyond any signs of weakness. jonathan: travel below 50 basis points for a little while. what were your thoughts when that happened? how tight does the spread get?

krishna: i think that trend will continue. looking for steepening in this environment is a fool's game in my personal opinion. the reason that is the case is because, if there is true inflation, markets would anticipate that the fed is going to slam on the brakes really hard and we are talking about a recession in the future. for a tiny bit, we may see steepening. overall, it's a flattening trend for the rest of the year. jonathan: is it a full trend? a little bit of steepening would not be too surprising. the only reason that they are flat and is the long and has been stuck. i think we get more inflation this year we get longer-term , yields to grind a bit higher and more supply that has to be absorbed by the market in 2018 and beyond. i would not be surprised to see a moderate amount of steepening. jonathan: do you see any of that? krishna: we might see

steepening, but i don't think it lasts. at the end of the day, we see that, inflation reappearing, the markets would anticipate a faster normalization and a less gradual path, and therefore a recession to get back to where we were. jonathan: some stellar data with the pmi in europe, but then the inflation data is not tracking what i'm seeing into the output numbers, whether it is soft sentiment surveys or the hard gdp figures for labor market numbers. you would expect to see that and on the other side, higher inflation numbers. you don't. why not? michael: that's one of the great mysteries. we think we will see higher inflation, but nothing dramatic, just a small uptick going forward. that said, we do think those inflation fears and more important, the supply issues that you mentioned. in the past two years, supply has not matter that all. we have gone from $4.5 trillion of debt outstanding in mid-2008.

we are going to hit $15 trillion by the middle of this year. just because we're not seen that pressure yet means you can go further and further out forever. we will be adding about $1 billion of additional debt every year for the foreseeable future. at some stage, people will have to start to pay attention to that and have curve steepening in here. i think the next refunding announcement in early february, we will see 30 year auctions -- auction sizes increase and that is when people get scared about the long and. -- the long end. jonathan: i spoke to gary earlier and he spoke about banking. the question was as follows, do you think there was a reason for the u.s. long and to sell off sharply if the banking deregulation bill kicks in and around q1? kathy: i do not think it will happen very quickly. i think it will take some time for deregulation to work its way through the system to produce

the kinds of results that would cause the long end to sell off. in terms of all the regulatory changes and tax changes i'm more , focused on the high-yield market at this stage of the game than the financials. jonathan: we are going to talk about credit in just a moment, but i want to get your thoughts on the inflation dynamics. breakeven rates are picking up. are we thinking about inflation l risk?ar as a tai do you need to hedge out or a base case that is going to materialize through this year? krishna: i think as michael was saying, that's the great mystery. i don't think inflation will pick up a lot. if it picks up a lot, we will see a much more forceful response from the fed to get us into a recession. counting on breakevens picking up in a big way, i don't think it's in good contents. -- i don't think it's good in this year's context.

jonathan: a really interesting note from jpmorgan and the basis that's not coming. what is the catalyst to get the premium up and is it coming? krishna: i don't think it's coming. i think it's coming after recession and not before a recession. kathy: there would have to be enough global growth to produce global inflation, i think what's held back our inflation has been this local -- slow pace of global inflation. there's been enough throughout this last decade. for the first year, we have seen all the major countries growth the same time. there is a lag effect with inflation. it could take a little while longer, but what worries me is the term premium is still negative. any surprise, the market is not priced for it at all. krishna: her point is a really good one, which is that it has to come from overseas. the challenge is that in emerging markets where you would expect this to materialize at this point, actually, inflation expectations are relatively flat

and that's one of the reasons why emerging-market rates are so well and good at the moment. jonathan: michael? michael: we had two pieces behind the flattening and one has been the low inflation and the fed creeping higher. that has been the long-term, structural flattening. but then since september, we just had this dramatic move in five 30's from 100 basis points to just above 50 basis points. that has been this extreme tension bid. some of that may be related to tax changes and we think that will fade as the years go on. -- as the year goes on. the spec continued support for the long and early in the year, but we think that tension bid fades as the supply gears pick up. jonathan: michael cloherty, kathy jones, and krishna mamahni sticking with me. in a race with emerging market economy, the race for foreign capital. that's next. this is "bloomberg real yield." ♪

♪ jonathan: from new york city to our audience worldwide, i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now, where we start with a little look into the crystal ball for 2018. $680 billion of high-grade u.s. dollar denominated corporate bonds are due to mature before year end. this is likely to be a signal of who will lead issuance in 2018. outside the event states, there's a race among em countries to secure capital. this week, mexico completed a debt sale totaling $2.3 billion with demand reaching $15 billion. sold $19 billion of debt with more than half of

investors coming from north mecca. both countries taking advantage of the lowest borrowing costs in a decade. still with us, michael, kathy, and krishna. i want to take the opportunity to talk about credit and i want to begin with you. something struck me about last year. the junk etf, you expect risk assets to perform more broadly and junk lagged. it lagged the s&p 500 and my question more generally is why? why is high-yield not keeping up with the rally you see in risk assets? krishna: i think the answer is simple, high-yield shares are just too tight. there's nothing magical about it. high-yield has had a substantial run over the last seven to eight years. we are at a spread level on the indices that lifted up some 300 because it is difficult to get yourself to buy high level at that yield and feel good about it. kathy: i would agree with krishna. spreads are tied, valuations are

high and the credit quality is deteriorating. then you add the tax bill onto it, which is not favorable for high-yield issuers. you don't have a great case there to be made for being all in on high-yield. jonathan: i asked bill gross about his exposure to high-yield and junk, whether he had any and what he would advise others. this is what he had to say earlier on bloomberg radio and bloomberg tv. >> i am short it was the. -- short hyc. spreads are very narrow and they follow the stock market. it's almost always a one to correlation. one if the stock market goes up 1%, the spreads in the price of the cbx goes up by a quarter of that. jonathan: a huge difference between sitting here and saying 2018 is the year for coupon clipping. you're not going to get the capital returns your got the last couple of years, between that and saying i'm going to go short. krishna: i have an issue with

what he was saying. i don't think high-yield spreads are very attractive, but expecting them to widen meaningfully, which is what you have to have to have a short position, i don't think is realistic either. i think high-yield does ok, you can clip the coupons, but they don't widen meaningfully. if they do, it's in the back half of the year rather than the first half. we have enough global economic momentum going into it that equities do well in high yields -- do well and therefore high-yield do well. jonathan: i asked bill to clarify what are you looking to happen and is reasoning is the front end of treasuries. they will get this real pickup that at some time will test high yields. what levels are you looking for on a two-year treasury this year? we are pretty much at the 2% mark already. michael: we are looking at four rate hikes this year so we think there's further to go on that. we think there will be more rate hikes next year. we think we are going to continue to see pressure on

those. the other issue on the front of the curve is that this tax bill may have impacts on investment grade also. you have over $2.5 trillion of trapped offshore cash that right now is largely invested in high quality u.s. fixed income assets. when that money comes home, it is likely to be diverted to other purposes. you have this massive buyer base and you don't have a $2.5 trillion shift in investment mix without leaving a mark. jonathan: are also the big buys -- big buyers are the big issuers. what are you left with on the back of the repatriation story? kathy: i'm not really concerned about the repatriation because i think it may not be as massive as everybody expects. our past experience is that it's been pretty modest. secondly, i think the balance will work itself out in the investment grade area. high-yield is another issue

related to not only the spreads , but the tax bill and the ratio being high.expense jonathan: that's got to mean something for credit, doesn't it? krishna: i hope michael is wrong and i think the markets hope michael is wrong. especially for this year and next year, because if that is the case, we're looking at a recession in the not so distant future. if we get four rate hikes this year and we expect two or three more next year, i think we're looking at a recession. jonathan: the base case right now is three. an extra 25 basis points is the tipping point? krishna: the expectation is the u.s. economy starts slowing down. if it's the case that michael is making, the u.s. economy is not slowing down. the global economy overall continues to do well and we go further in the path to normalization. again, we don't expect a

recession anytime soon. we continue to believe this will be the longest business and credit cycle that all of us have ever experienced. having said that, if his views come about, that's an issue. jonathan: weigh in. michael: first on the repatriation, the defensive team this time and last time, last time, you got taxed on the money brought home. this time you get taxed whether you bring it home or not, so why would you bring it home? the only thing that will stop the fed is if we get massive movement in credit spreads. that will knock a rate hike out of the picture. it is sort of, that's the break on the fed. we do think these will see some periodic pressure on things, but a massive gap wider in risk assets. jonathan: i want to wrap things up. if you believe this could be the longest cycle ever, but you think spreads are too tight, then answer this, where do you take credit risks that will

generate considerable capital returns? if this is the longest cycle, put money to work. it can't be risk completely. krishna: if you're looking for capital returns, buy equity for god's sake. you're looking for some level of income and not meaningful capital appreciation. we think within the credit markets, the most attractive asset class is emerging-market local debt. that is driven by their high level -- their high rate levels plus the fact that the dollar remains stable or continues to weaken. that is really the best case i can make for that asset class. other than that, credit overall, if you clip the coupon you can , consider yourself lucky. jonathan: kathy, you have the final word here. kathy: i think most risk assets are highly valued and emerging-market bonds would not be my choice. 26% of that is denominated in u.s. dollars and i think the dollar has some room to move up.

i think at the short end, in investment grade, i do not think there's a really great place to hide right now. jonathan -- kathy, michael and krishna. you are sticking with me. i want to give you market check of where treasuries have been. tens and 30's as we go toward the end of the week. yields up on a two-year note by eight basis points to 1.96%. we are zooming into that 2% level. up on the long end as well by -- as well. bank earnings in the united states and important data out of the americas coming at the back end of the week. this is "bloomberg real yield." ♪

♪ jonathan: this is "bloomberg real yield."

i'm jonathan ferro for our audience worldwide. time for the final spread. coming up in the next week, a series of u.s. economic reports, concluding on friday when we get cpi data and retail sales as well. on the earning site, a kicks off big time at j.p. morgan and wells fargo. in politics, a lot going on is always. keep an eye on the french president as he heads over to china and talks in korea , something to keep an eye on as well. final thoughts with michael cloherty, kathy jones, and krishna memani. retail sales, cpi's, something you got your focus on? yes, usual for the time a month. decent readings on both. the important thing about cpi is that on a year-over-year basis, it's slightly higher for technical reasons. we had a big dip early last year. looking year-over-year, it will actually outperform what most

people's expectations are. jonathan: michael? michael: same. retail sales data, we had so much momentum recently, but even a soft month, we still had good quarter. an impressive gdp number. i think we will pay more attention to the inflation data. jonathan: at what point is that story of we got a tax cut i'm going to spend more money kick in? does it kick in at all? michael: i think it does. normally when you get tax cuts, it's coming out of recession and everyone's terrified and you don't spend the money. at this point, you are much more likely to spend. you will start to get withholding changes going forward, so people don't start to see the cash immediately. it's really not until april of next year that people will see the big change in what's in their wallet. jonathan: krishna? krishna: the thing to remember is more corporate tax cuts where the impact is going to be needed -- be muted to begin with. you will see it, but you will see it in a very faded way if at

all. from an inflation standpoint, retail sales standpoint, both of them are looking good at this point. at the end of the day for the markets, it doesn't really matter. we firmly believe that the entire market firmly believes that we are in a growth momentum phase. whatever the data is, we will look through that. jonathan: and that the takeaway? don't pay attention to the economic data really? krishna: don't pay attention to the economic data for the first half of the year. it's bad for a pontificator like myself, but good for the market. jonathan: let's get to the final round and get your quick final thoughts and whipped through a couple of questions. we get through the growth poor story. is that regime here to stay, yes or no? michael: yes. krishna: yes. kathy: yes. jonathan: on treasuries, could

we hit zero by year-end? michael: no. kathy: no. krishna: yes. jonathan: reduce high-yield exposure to zero, would you reduce high-yield exposure to zero, get out, or stay in? michael: stay in. kathy: reduce, but stay in. krishna: stay in. jonathan: my special thanks to all of you, thank you. that does it for us this week as we kick off a brand-new year and 2018. happy new year to you. we will see you next friday at 12:30 p.m. new york time. this was "bloomberg real yield." this is bloomberg. ♪ ♪

>> welcome to the best of bloomberg markets, middle east. i'm tracy alloway. across the we come antigovernment protests sweep across iran. inviting threats of sanctions from the u.s.. oil prices surged to three-year highs on fears of supply disruption as u.s. stockpiles fall. as the u.s. convex a turkish banker of helping evaders iran sanctions. relations between the two bank countries hit a new low. first, t