jonathan: from new york city for our viewers worldwide, this is 30 minutes dedicated to fixed income. i'm jonathan ferro. 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 unexpected jobs report is unlikely to derail the federal reserve. and economic data in europe looks hot, but inflation calls. we begin with the big issue, the payrolls report. >> it isn't bad, would not overreact to this report. growth in the jobs market is

solid. >> disappointing in many ways, .3% increase in wage growth. we could still be on a path to 3%, so that could be a sign of improvement in the job market. wages would be .3%, revisions would be back down to .1%. .2% per month is what we are looking at. 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 pretty solid labor markets that are not extremely overheating, but it is a good thing for markets and a good thing for equities. >> this is not a labor market humming along, it is certainly not consistent with needing to raise rates. it pushes the fed's possibility back.sing this is a labor market that potentially looks like it is beginning to slow. >> the labor market is actually really hot. the run rate for job growth is a

below 100,000. anything above that is taking away the slack in the labor market. >> the labor market is not hot, it is not humming, it is 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%, 17 year lows. we are going to see real wage pressure in here. around theoining me head of michael , u.s. rate strategy. kathy jones, chief fixed income strategist for financial armani,, and crystal chief investment officer at oppenheimer funds. do you just want to jump into the debate and help us out? >> i think it is warm, it is solid. it is moving along. you only need to create about 100,000 or less jobs to keep diminishing the slack in the labor market. so, underneath it all, there was good news. participation rates of prime age workers are moving higher. it is well above where it has been over the last five or six years.

so that means people are coming back into the labor market and things are moving on. >> from a markets perspective, even if it is classified as not so hot, it does not matter. there is enough momentum in the economy and tax cuts are coming. so on the back of it, markets are going to see to it and that is exactly what they are doing. after initial debt, the yields are back up. at the end of the day, economies on a mobile basis are doing well and that is what the markets are focused on. >> in line with krishna, the biggest news is the change in sentiment in the market. a year ago, everyone would have been looking for the worst-case scenario out of every report. jonathan: a reason not to do something. >> now we move for five minutes back tomarket went where it was. people are much more willing to look beyond signs of weakness. jonathan: let's talk about what the market has been doing. it traveled below 50 basis

points for a little while. what were your thoughts when that happened and how tight does that spread get? krishna: i think that trend will continue. looking for steepening in this sort of environment, i think is a fool's game, in my personal opinion. the reason that is the case is because if there is true inflation, then markets would anticipate that the fed will slam on the brakes really hard. we are talking about a recession in the not-too-distant future. yes, for a tiny bit, we may see that steepening, but overall it is a flattening trend for the rest of the year. jonathan: is it a fool's game, kathy? kathy: i would say a little bit of steepening would not be to surprising. keep in mind, the only reason the curve is flattened because the short and has moved up. it has been stuck for almost a year in a very narrow range. i think we have to get a little bit more inflation this year, and we have to get more supply observed by the market in 2018 and beyond. i would not be surprised to see a moderate amount of steepening. jonathan: krishna, do you fight

any of that? krishna: absolutely. i think we may see steepening, but that cannot last. if we see that inflation reappearing, the markets would anticipate a faster gradualation, less of a path, and therefore, a recession, which gets us back to where we were. jonathan: stellar data, the united states, the pmi's in europe, then the inflation data is not tracking what i am seeing in the output numbers. whether it is soft sentiment surveys, the hard gdp figures, the labor market numbers, you would expect to see that. on the other side, higher inflation numbers. you do not. why not? michael: that is one of the great mysteries over the past few years. we think we will see a little bit higher inflation, but not that much. just a small uptick going forward. but that said, we do think those inflation fears, and the supply issues that you mentioned. you know, in the past few years, supply has not mattered at all. we have gone to $4.5 trillion of

mid-2008,anding in government debt outstanding in the middle of 2008, and we will hit $15 trillion by the middle of this year. but just because we have not seen a pressure does not mean you can go further and further forever. we will add $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 we will have to have some term premiums back into the curve, a bit of steepening in here. i think in the next refunding announcement in early february, we will see 30 year auction sizes increase. i think that is when people get scared about the supplies. jonathan: kathy, a question from one of our viewers. we talked to gary cohn and he talked about the deregulation around banking. do you think there is a reason for the u.s. long end to sell off sharply if the banking deregulation bill kicks in around q1 as suggested by gary cohn? kathy: i do not think that will happen very quickly. i think it will take some time for deregulation to work its way

through the system to produce the kind of results that would cause the long end to really selloff. in terms of all the regulatory ianges and the tax changes, am more focused on the high-yield market at this stage in the game that i am about the financial. jonathan: we will talk about credit in a moment. krishna, i want to get your thoughts on the inflation dynamics. break-even rates are picking up. are we thinking about inflation this year as a tail risk, if you need to hedge out, or will it materialize through the year? krishna: as michael was saying, that is the great mystery. i think inflation would pick up a tad. i do not think it picks up a lot. if it picks up a lot, i think we will see a much more forceful response from the fed to get us into a recession to get all of that out. so i'm counting up on breakevens picking up in a big way. for inflation materializing, i don't think this year's context is real.

jonathan: it was about term premium and what it would be to get it up, jpmorgan said it is not coming. what is it going to take to get premium up and is coming? krishna: i think it is coming after a recession, not before the recession. kathy: i think we have to have enough global growth to produce global inflation. one of the things that is holding back our inflation is the sluggishness in global growth throughout the last decade, really. this is the first year in a decade we have seen all the oecd countries starting to grow at the same time, so there could be a lack in inflation. what worries me is that the term -- lag in inflation. what worries me is that 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. it has to come from overseas. the challenge there is in emerging markets, where you would expect this to materialize at this point. in fact, inflation expectations

are relatively flat and that is why emerging-market rates are so well anchored. jonathan: michael? michael: we have had two pieces behind this flattening. one has been the low inflation and fed creeping higher that has been a sort of long-term structural flattening. since september, we had this dramatic move from five/30 -- 5/30's from 100 basis points to 50 basis points. this has been a extreme pension bid. some of that may be related to tax changes. we think it will fade as the year goes on. we are expecting to continue support for the long end early in the year, but then that pension bid fades right as the supply fears start to kick up. we will have a little fear later this quarter. jonathan: kathy jones and krishna jones will be sticking with me. next up, the auction block, mexico and argentina in a race with emerging markets. that is next. this is "bloomberg: really

-- real

♪ city for from new york our audience worldwide, i'm jonathan ferro and this is "bloomberg: real yield." i want to start at the auction block, where we start with a look into the crystal ball for 2018. billion of high-grade corporate bonds to mature in 2018, led by the banks. this is likely to be a signal of who will lead issue in 2018. outside of the united states there is a race to secure capital. this week, mexico completed a 2ebt sale totaling $3. billion, total amounts reaching argentina sold $9 million in $15 billion. debt.

$21 billion, with half of the investors coming from north america. both countries to the frontage of the lowest borrowing cost in nearly eight decades. still with me, michael, kathy jones and krishna from oppenheimer funds. guys, i want to take the opportunity to talk about credit. i want to begin with you. something struck me about last year with the junk etf. you expected risk assets to perform more broadly. junk lagged the s&p 500. my question more generally is just why? why is our yield not keeping up with the rally in risk assets? krishna: the answer is simple. high-yield spurts are just too tight. that is what it is, there is nothing magical about it. high-yield has had a substantial, substantial run over the last 7-8 years. we are at a spread level on the cds indices, let's say sub 300, it is very difficult to get yourself to buy high-yield at that level and feel good about it. jonathan: kathy? kathy: i would agree with krishna. the spreads are tight and

valuations are high and credit quality keeps deteriorating. and then you add the tax bill onto it, which is not favorable for high-yield issuers. and you do not have a great case there to be all in on high yields. jonathan: i caught up with bill gross and asked him about his exposure to high yields and junk and whether he had any, and others tould advise be doing? take a listen at what bill had to say on bloomberg radio and bloomberg tv. bill: spreads are very, very narrow and they follow the stock market. it is almost a 1-4 correlation. if the stock market goes up 1%, then spreads and the price of the cbx goes up by a quarter of that. jonathan: krishna, there is a huge difference between sitting here and saying 2018 is a year for coupon clipping, you will not get the capital returns you got over the past 20 years. between that and saying i'm going to go short.

krishna: i have to take an issue, i have an issue with what he was saying. i do not think high-yield spreads are very attractive, but expecting them to widen meaningfully, which is what you would have to have to have a short position, i don't think it is realistic either. i think high-yield does ok, you could clip the coupon, but they do not widen meaningfully. if they do, it is probably in the back half of the year rather than the first half. we have enough global economic momentum going into it, but equity does well and high-yield does well. jonathan: what are you looking to happen? bill posey reasoning is what will happen at the front end of treasuries. at some time, this will test high yields. what levels are you looking for on a two-year treasury this year? we are pretty much of the 2% mark already? >> we think we will get more rate hikes next year, further to four rate hikes this

year, further to go and we think we will get more rate hikes next year as well. we think we will continue to see pressure on twos. the other issue with the front of the curve is the tax bill may have impacts on investment grade also. you have got over $2.5 trillion of trapped offshore cash, which , 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 do not have $2.5 trillion shift in investment without leaving a mark. jonathan: so the thing about that they are eating their own , cooking. they are the big buyers. they are also the big issuers. happy, what are you left with -- kathy, what are you left with on the back of the repatriation story? kathy: they may not be as massive as everybody expects. our past experience has been it has been pretty modest. it has dragged. and secondly, i think the balance will work itself out in the investment grade area. again, high-yield is another

issue related to not only the spreads, but the tax bills than these ratios of interests expenses being high. jonathan: krishna, if we have hikes, thatur rate has to mean something for credit. krishna: i hope michael is wrong. certainly for this year and next year. if that is the case, we are looking at a recession in the not-too-distant future. jonathan: you call that a recession risk? krishna: absolutely. if we get four rate hikes this year, and we expect two or three more next year, i think we are looking at a recession. jonathan: the base case right now is three. krishna: with a base case of three, the expectation is the u.s. economy starts slowing down. the case that michael is making, the u.s. economy is not slowing down, global economy continues to do well overall and we will go further in the path to normalization. aain, we do not expect

recession anytime soon. we continue to believe this will be the business encouraging cycle that all of us have ever experienced. having said that, if his views come about, that is what you should worry about. jonathan: michael, weigh-in? michael: two things. on the repatriation, the difference between this time in -- and the last time as last time you only got tacked on money you brought home. whethere, you get tax you bring it home or not. why would you not just bring it home? on growth, the only thing that will stop the fed this year is, if we get massive movement in credit spreads, that will spook the fed and will knock a rate hike out of the picture. that is the break on the fed. we do think we will see some periodic pressure, but a massive gap wider in risk assets. jonathan: let's be quick, 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. you cannot be risk completely. krishna: buy equities if you are looking for capital returns. what the credit is supposed to provide is some level of income, not meaningful capital appreciation. we think within the credit market, the most attractive asset class is emerging-market local debt. that is driven by the high level of high rate levels, plus the fact that the dollar remained stable or continues to weaken. that is really the best case i can make for that. other than that, credit overall, if you clip the coupon, you consider yourself lucky. jonathan: kathy, you have the final word here. kathy: i think the most risk assets are highly valued, and emerging markets would not be my choice. jonathan: what would they be? kathy 26% of that is in u.s. : dollars and i think that the dollar has some room to move up.

you know, i stay at the short end of investment grade. reallyt think there is a great place to hide right now. jonathan: sticking with me, kathy, michael and krishna. i want to get a market track on where treasuries have been this week. twos, tens, and 30's, as we go toward the end of the week. yields up by eight basis points. up to 1.96%. we are zooming into the 2% level. up in the long and as well -- end as well. the final spread, the week ahead featuring bank earnings and some important data coming out of america on the back end of the week. that is coming up in just a moment. this is "bloomberg real yield." ♪

♪ jonathan: this is "bloomberg

real yield." i'm jonathan ferro. for our audience worldwide from new york city, it is time for the final spread. coming up over the next week, we get a series of u.s. economic reports, concluding on friday when we get cpi data and retail sales as well. plus, on the earnings side, it kicks off big time with jpmorgan and wells fargo, bank earnings come through and politics has a lot going on, as always. keep an eye on the french president, emmanuel macron, as he heads over to china and talks in korea. that is something to keep an eye on as well. still with me around the table, my guest. some final thoughts. retail sales, kathy, is that we you have your focus on, cpi? kathy: the usual for this time of month. i think you have decent readings on both. the important thing about cpi is, on a year-over-year basis it is likely to be higher for technical reasons. we had that big dip last year earlier in the year. if you are looking at it year-over-year it will probably

outperform what most people's expectations are. jonathan: michael? michael: same. with sales data, we have had so much momentum recently that even if you had a soft month, you still have a good quarter. you have an impressive gdp number. we are paying a little more attention to the inflation data. jonathan: at what point do think -- do you think the story of we have a tax cut, i will spend more money, start to kick in? michael: normally when you get tax cuts it comes out of recession, everybody is terrified so people do not spend the money. you get one this point, you are likely to spend. you will start to get withholding changes going forward, so people do not start to see the cash immediately. it is really not until april of next year that you -- that people will see the big change of what is in their wallet. jonathan: krishna? krishna: the key thing to isember in aspect of that corporate tax cuts and personal tax cuts, the impact will 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, as kathy said, both of them are looking good at this point. but at the end of the day, for the markets, it does not matter. we firmly believe the -- the entire market firmly believes that we are in a growth momentum phase. whatever the data is, we will look through that. jonathan: is that really the takeaway now? forget the economic data? krishna: don't pay that much attention to the economic data for the first half of the year. torss bad for pontificate like us, but it is a good situation for the markets. jonathan: we put you guys in your box and get quick final thoughts. we will go through a couple of questions. we begin. -- growth that should rich, inflation poor story, is that regime here to stay through 2018? michael: yes. krishna: yes. kathy: yes. jonathan: could the treasuries

hit by year-end? zero michael: no. kathy: no. krishna: yes. jonathan: the reduced yield exposure to zero -- would you reduce high-yield exposure to zero, get out, or stay in? michael: keep some in. kathy: reduce but stay in. krishna: stay in. jonathan: my special thanks to all of you. thank you michael, kathy and , krishna. that does it for us this week as we kick off a brand-new year in 2018. happy new year to you. we will see you next friday at 12:30 p.m. new york, 5:30 in london. this was "bloomberg real yield." this is bloomberg. ♪

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scarlett: i'm scarlet fu. this is "bloomberg etf iq." here is where we focus on the assets, risks and rewards offered by etf. ♪ scarlet: is the tide turning for commodities, with oil back at $60 and then trading at an 11 month high? what are the best etf's for this recovery? we sit down with mark levine of the illinois state board of investment on why he soured on hedge funds and put his weight behind