30 minutes dedicated to fixed income, this is bloomberg real yields. ♪ >> coming up, the job report has climbed since 2009 and has helped sink treasury and bonds break 3%, and after showing signs of resiliency, credits begins to crack. we begin with the big issue, the u.s. jobs report. >> this is a solid report. a overallk it is

positive backdrop for the economy. >> it suggests the job market is going to heal and i would be surprised if the bond market didn't take us to account. we havee last 70 years never seen unemployment rate at 4% when the deficit spending is 4% deficitease from to five, so this is an economy running caught right now. >> wages are gradually beginning to pick up and there is evidence we are closing in on full employment and this is the start of a more pronounced acceleration and wages. thisere's volatility in aid a and the rush to judgment is a little too soon. it is probably pulled in from the folks in the top and. end. taxt is the impetus for our

plan to create real sustainable wage growth. this something that was missing from the country for a long. time.od of coming to us from boston -- codirector of global income. it is great to have you on the program. is it make sense for the treasury to be woken up to the world around us? nothing to me has fundamentally changed in the last couple of weeks, this story existed for months, and the treasury woke up, why? >> focused on inflation -- treasuries are going to go on a higher yield if we see inflation. that changed after tax reform and of number of new factors came in that created this -- the dollar decline. the dollar decline is an issue. trade dispute. china is the biggest buyer, and

now the tax deficits. those things have changed the dynamic of inflation and why yields have jumped up. let's get that yield down, how much every repricing have we seen so far? >> i think you have seen a big move of inflation break even which tells us some of it is coming -- we now start to see it move higher which tells there is growth in inflation coming through, and potential growth is maybe higher and tax reform is stimulative. antral banks are buying trillion dollar less assets in 2018 than they were in 2017. repricing of treasuries as a market catching up to what has happened already or a market trying to get ahead of what is to come this year? >> i think it is both.

this payroll report, it is a market catching up to a confluence of factors. talk about synchronized global growth in 2017 and early 2018, monetary policy whether it is the fed raising rates or the ecb buying bonds at a slower pace than it has in the past. perspective, the tax reform, all signs pointing to higher yields whether it be monetary, fiscal, growth, or inflation. >> we came into this year of a consensus view that we will get a flatter yield curve and some people said it was becoming a much crowded trade. i am wondering if we are taking some of that off or putting caps on? >> i think one of the surprises this year will be a steepening of the curve, the market came in to a flatter curve, typically when the fed is raising rates,

the curve is flattening. rate cycles, we have seen five. the curve stephen as budget deficits were rising, so we have a similar phenomenon today even with the increases in the front and issuance over the next two months. next year they are looking at funding another $300 billion of treasury debt at least to come from somewhere. there is a possibility they will extend -- given how flat the yield curve has gotten. is his 1986 -- is this 1986? 1986, but it is the steepest since november -- there is some parallels to that. i am trying not to fall into the

same trap that others have at the beginning of every year for the last five years when we get good growth and a surge in treasury prices and we get hopeful inflation that drives interest rates higher, only to have its peaked and turned out before the end of the year. at 280?ike the treasury >> i do. >> obviously, the bigger distortion is in european sovereign yields. points,is on 10 basis and that over 4%, three rate hikes priced and for the next three years in europe. that seems modest given the data. >> let's talk about that, not just europe but japan as well. they are capping yields at 3%. yields at are capping

50 basis points, and the boj is capping points at 0.1%, is this craziness? >> you couldn't have said it better than that. >> when you think about it that way, past resistance of the yields is indeed higher, but how much higher is the back of japan going to keep a lid on every thing that happens there? >> that is a fair point but one of the biggest distortions is because of purchases and credit markets rather than an treasuries. guessing tremendous amounts of overseas buying, 45% of the u.s. corporate market today is overseas versus 25% 10 years ago. distortions are coming through risk assets more so at this point that through rate markets. >> i think it is a great point that she is making, it is the best trade in the sovereign marketplace for a while now, buying treasuries. will that trade still be good

now that italy is facing inflationary pressures? does it make it a value back to other sovereign debt? that is something we will watch closely, but it is the best strategy on the board. we talked about the boj before and the are capping the yield -- one of our favorite trades is shorting the 30 year part of the curve -- they don't control in a free market part of the japanese bond market curve. >> is that the widow maker? is different it because as you said before, the yield control policy is suppressing yields throughout the curve up to 10 years effectively. that park is more freely floating, but the economy in japan is growing and there is good governance going on and an

inflation -- given the strength of the japanese economy, i think being short of the 30 year curve is a good place to be. >> you had to be short somewhere there would be? onsi think it would be bo -- is a 30 year a 40 year issue, and we are about to see higher rates in germany in particular. it has been a rough week for risk assets. coming up on this program, we will head to auction blocks. that conversation next. this is bloomberg real yields. ♪

is bloomberg real yields, i want to take you to the auction blocks and the u.s. treasury boosting its borrowing for the first time since 2009 in order to cover the budget deficit. it will increase the deficit more than 600 and six 5 billion in the last fiscal u.s. meanwhile your investment has sold more than 220 billion in january, a drop of 3% and marks the lowest total in that month and three years. million --rly $550 the company able to arrest risk .remiums still with me around the table

-- kevin giddis and eric stein. kevin, you've got to say we have this selloff of risk assets at the moment. selloff in treasuries and equities. we're starting to see some cracks, but i wouldn't call it a credit stretch, would you? >> know i wouldn't. since the fourth quarter of last year, the treasury has gone up 80 points, spreads on investment rate has widened 40 basis points. demand is still strong, so what i am looking for is stresses in high yields. we also aren't seeing corporate defaults, and until we see cracks like that, it is still an attractive trade. look at theyou chart right there, equities has rolled over, are you surprised by the fact that comparatively so, the credit estate resilient?

equitieshard to say, rolling over given the rally we have had over the last few months. with rates growing higher high-yield has a retail-based orientation. thes less sticky money than institutional demands, so i am not surprised to see for continuous weeks of outflows in the high-yield etf space. we are through cycle types and timesis points off of all highs in the market, especially when everyone is optimistic on the equity market. >> you expect to see the cracks where surrogacy materialized into something much bigger? >> right now i would say no. riskay we think about factor, spreads, don't think

about an etf but a spread of a high-yield bond. and haveave been tight widened the last couple of days given the risk of selloff, but some of the decline you have seen an etf's are the duration of high-yield ons based on u.s. treasuries. still a good chance you earn your coupon and have risk if it is a risk off deflationary environment or a higher rate deflationary environment. the higher rate repricing leading to distress in the market is a bigger risk than a deflationary risk off, so i think there is a good chance you can earn your coupon but not as much value from a year or so ago. >> you may be thinking about the credit and focused on what is happening on peripheral spreads and what is more remarkable is the likes of it -- spread is still tight, does that make sense? to me, never made sense

but you get the protection of the european union or the ecb. when you look at the of economies of these countries, which are rather own a tenure at 145 or a u.s. treasury at 280 today? it goes up and down the line, it offers great protection, currency protection, market protection, at some point that will crack. >> lisa, your thoughts? you want to be italy or germany? >> there is an election coming, and before the french election french yields sold materially, i think the market is forgetting about that. i think italy has it participated in the selloff in rates last few weeks. this is it a market that is mispriced. >> mispriced by how much? is this something that is going to have more sustainable upside?

i i can't make a promise, think it is a structural trade. you look at the dependency ratios and italy and the demographic issues that italy is facing over the next several years is not a pretty story. i think it is more structural. in the near-term with the come to terms that the ecb has been buying the net debt in europe, and are stepping away from that market. >> do you short italy? we have sure positions going back to 2005 and 2006 with greece and italy, more recently we had short italy positions. optimistic with italy because it appears to be a one-way trade where spreads continue to tighten almost every day. i would agree with the previous guest that it doesn't make sense but the tough part about the european bond markets is that

they trade like a credit market and credit spread that makes more inherent sense for us. volatility, itn grinds tighter every day, so a lot of fundamental problems with italy and or could be volatility around the election. >> eric touches on something important. after the crisis, are we going to see trade like credit or a rates market? once the ecb market begins clear, it will trade like icredit market, less like -- should say more like a rates market and less like a credit asset. lisa sticking with me, alongside kevin giddis, and next on the program, who will walk you through the spread. here is a check at the markets.

yields higher through the week, and what a move you have seen in the u.s. treasury, up 17 basis points on the week so far. it is a steeper curve in the united states. next up, the week ahead. a preview of the week to come. this is bloomberg real yields. ♪

>> this is real yield, and i want to head to the final spread . we get a rate decision from the bank of england with mark carney delivering that. in delivering his report -- the annual report, and annual earnings including tesla, and the potential for another u.s. government shutdown, which most of us have become desensitized to this point.

we were talking about central bank decisions before the break, and what it means for peripheral europe and the ecb. the 2019 story, who runs the ecb next? i'm surprised by how governor kuroda is to the bank of japan. the next person who takes over for mario and draghi has big shoes to fill. so you're hoping it is a german text the top spot? >> i think that may be the case. it is a selloff environment for european bond yields that have been anchored by the ecb program, by lower yields.

there is a different cast of characters and we are trying to make expectations based on what they are telling us. set andwhole different it could be a whole different ecb next year. do you react to that, should you respond to that? >> not immediately but i think there may be a shift in focus. much like it has been a pro usa or pro-america focused -- maybe there is a pro-german focus within the ecb or within the european union. that could be to the detriment of some other countries. imagine the damage done if you have an aggressive repricing of sovereign yields and credit? let's say you have a more conservative central banker in the hot seat -- i would they want to do that anyway? point --ing up a good

given where europe is in the business cycle, it might matter a little bit but not that much if we have another european sovereign debt crisis, and then it would matter a lot. i would like to play the height game.ame -- hindsight benign state of the world, it matters a little bit of the value of the euro and italian government bond yields, but it is a crisis situation that matters a lot from a policy perspective. guys, great to have you with me. look at the final spread, to the apidfire round will ask you quick question and a quick reply. we begin with the selloff in treasuries as we approach 3%.

trade orar inflation accept that 3% is coming on the u.s. 10 year? >> by at 3%. 3%.tfinitely by at 0.1%, buy gilts at and hold, tenure treasuries -- buy and hold, lisa? >> treasuries. >> jgb's. you,e final one for all of italian sovereign debt or u.s. high-yield through the year end?

it is credit risk in europe or the u.s.. >> neither one of them, treasuries. >> i will stick with high yields. >> stick with high yields as well. very much for you the work you have been putting on thin the last couple of months. that does it from new york. we'll see you next friday at 12:30 p.m. new york time. this was bloomberg real yields. this is bloomberg tv. ♪

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

where watching at this hour. miranda -- the house released a memo, and the only benefit is the vladimir putin. we talk to the former head of how his old agency is faring a leader that has been -- should have been created in the first place. comes as he wants new trade relations and how will get there. ♪ shery: breaking news, a republican memo that shows fbi bias has been released and it is the bombshell it was expected to be.