jonathan: from new york city for our viewers worldwide, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, a solid jobs report. wages climbed the most since 2009, and has helped sink treasury and 30 year bonds break 3%. after showing signs of resiliency through the week, credit begins to crack. we begin with the big issue, the solid u.s. jobs report. >> this is a perfectly solid report. >> we think it is quite solid. >> we got quite good news today. >> we think it is a overall positive backdrop for the economy that is about to also get more tailwind from the tax policy.

>> it suggests the job market is continuing to heal and i would be surprised if the bond market did not take this into account. this unemployment rate is 4%. >> would not seen this before. this economy is running hot right now. >> wages are beginning to improve. we are probably closing in on .1 employment. this could be the start of more of acceleration in wages. >> i think the rush to judgment was too soon. it looks like it was cold out by folks that the top end. >> we're excited to see a 2.9% wage growth number. the impetus for our tax plan was to create sustainable wage

growth, something that was missing from this country for a long time. jonathan: kevin, let's begin with you. nothing for me has really fundamentally changed in the last couple weeks. >> we spent most of last year focused on inflation as far as the bond market was concerned. reformanged after-tax and a number of new factors came into the market. the dollardefined, decline. trade disputes. china is the biggest buyer.

now the deficit. if you're not taxing and your spending, you are going to build deficits. down.an: let's strip that how much of the repricing have we seen so far? >> i think you've seen a big move with inflation breaking even. now we will see real yields move a bit higher. some growth inflation moving through. maybe tax reform is stimulative. central banks are buying a trade dollars less assets than they did in 2017. of treasuries at a market cap, market trying to get ahead. now it is aight

market catching up. u.s. growth but it is really synchronized global growth. monetary policy, whether it is the fed raising rates or the ecb buying bonds. from monetary perspective as well as the scope policy, science point toward higher yields whether it is monetary policy, fiscal policy, growth, or inflation. jonathan: the consensus view was that we are going to get a much flatter yield curve and some said much more crowded trade. i wonder if we are taking some of that awful are putting some on. surprises one of the will be a 2/10 curve. typically when the fed is raising race, the -- when the

fed is raising rates, the curve is flatter. the curve steepen and after reagan's but there is a similar phenomenon today. even with increases in front-end issuance, next year they are looking at they need to fund another 300 million in treasury debt. that needs to come from somewhere. i think there is a possibility they will extend. >> i don't know if it is 1986, but we have seen the curve points, theasis steepest it has been since mid-november up last year. jonathan: when you put it like that comments on some dramatic. tothere is some parallel that, but i'm trying not to fall into the same trap others have

at the beginning of every year for the last five years, when you get some good strong growth and a surge in treasury prices and hopeful inflation that drives trading higher. jonathan: do you like the treasuries i 280? kevin: i do. >> i think there is a better for you here then they had a few weeks back. i think there is a bigger distortion and cyber yields. germany's basis points weld 5%. three rate hikes priced in for the next three years in europe, that seems modest given the data. jonathan: let's talk about that. the boj had a limited amount of bonds at a fixed rate. cappingys are not yields at 50 basis points. at 58.1is capping

percent. this is craziness isn't it? >> you could not say it any better than that. jonathan: how much higher if the bank of japan is going to keep a lid on everything that happens there? >> i think that is a fair point. but one of the biggest distortions of the ecb is markets.in credit about 45% of the u.s. corporate today is over saying for about 25% 10 years ago. we've seen that distortion more so at this point. great point she is making. it has been the best trade in the sovereign marketplace for a treasuries.uying will that trade still be good

now that you are seeing pressures?y some of these european countries it seeing inflationary pressures, does it affect the value here in the u.s.? we will look at that closely, watch that. >> they are capping with their yields based control policy. one of our favorite trades is shorting the 30 year part, basically where they do not control. a free market part of the japanese bond market. jonathan: a set called the would a maker or is it different this time around? >> i do think it is different. they are suppressing yields throughout the curve effectively but the part is more free. i think japan is growing. there is not a lot of inflation, but low inflation.

i think given the pressure on global yields and its strength in the japanese it economy, this is a good place for it to be. >> i think one of the greatest monetary failures is the bank of japan's inability to raise the inflation rate. ,t is a 30 year or i think what 40 year issue? i do think we are about to see and higher rates in germany particular. jonathan: it has been a rough week. we taken to the auction block coming up. conversation next. we continue to cover it the seller. this is "bloomberg real yield."

♪ jonathan: this is "bloomberg real yield." i am jonathan ferro. i want to take you to the auction block. the u.s. treasury boosting its borrowing for the first time since 2009 in order to cover the mounting budget deficit. long-term debt sales will increase to $66 billion this quarters. this comes against a budget shortfall that grew to more than $665 billion last fiscal year. meanwhile, u.s. investment grade issuers have sold more than 220 $120 billion in january, a drop of 3% since 2017, and marks the lowest total in that month in three years. tesla sold nearly $550 million of bonds. the company was able to slash the risk premiums. still with me around the table lisa hornby, 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. i have to say, credit is starting to reprice. we're starting to see some cracks, but i would not call it credit stress, would you? kevin: not quite yet. since the fourth quarter of last year, the treasury 10 year has gone up 80 points, spreads on investment grade corporate's has widened 40 basis points. demand is still very, very strong. so what i am looking for is those stresses, especially in high yields. we are not seeing that yet. we also aren't seeing corporate defaults, all-time lows, and until we see cracks like that, it is still an attractive trade. jonathan: lisa, if you look at hyg, you see some cracks starting to appear, but the chart right there, equities role over. are you surprised by the fact that comparatively so, the credit estate is resilient? lisa: it is hard to say that equity is really rolling over given the rally we have had over the last few months. with rates growing higher, high-yield has a retail-based orientation.

it is less sticky money than the institutional demand we are seeing in investment grade credit, so i am not surprised to see four continuous weeks of outflows in the high-yield etf space. from the valuation perspective, we are through cycle types and about 35 basis points off of all time tights in the yield market, especially when everyone is optimistic on the equity market. jonathan: eric, do you expect the cracks we are starting to see in credit materialize into something much bigger? eric: right now, i would say no. i think everyone is focused on etf prices. the way we think about it, we look at risk factors, spread. don't think about an etf but a spread of a high-yield bond. spreads have been tight and have widened the last couple of days given the risk of selloff, but some of the decline you have

in the etf's are that duration of the high-yield bonds selling out. still of pretty good chance to earn the coupon. a risk from the inflationary environment. right now, higher rate repricing. i would put it at a bigger risk than deflationary. a pretty good chance you could earn your coupon but not as much value left in the credit markets as we had a year or so ago. jonathan: i think the ecb might be more focused on what is happening with the peripheral spread. tight. are still does that make sense? >> you get the protection of the european union art ecb.

when you look at the economies of these countries, would you 145 or an a 10-year at u.s. treasury at 280. it goes up and down the line. i think he gives great currency protection, market protection. what to be sure of italy and spain here? >> sure. we forget there is an election coming up very soon. last year, french markets hold off materially. i think italy probably has not participated in the selloff in late's -- rates over the last few weeks. jonathan: mispriced for how much? is this get in and get out orders it something that will ?ave a more sustainable upside

>> i can't make a promise. i think it is a more structural trade. if you look at the dependency ratios, that demographic issues italy is facing over the next couple years is not a pretty story. i think it is more structural ,ut in the near term, the ecb the vast majority of the debt -- jonathan: you talked about how you'd be willing to short japan but -- >> we've had short positions going back to 2005, especially with greece and italy more recently. shortingtimistic, i am italy right now because it seems to be a one-way trade every day were spreads continued to tighten almost every day. it does not make a lot of sense. they seem to oscillate between trading like a credit market and

a rates market. right now it is trading more like a rates market. the spreads it seemed to go in tighter every. a lot of fundamental problems for italy. it has been a tough trade. peripheral europe started trading on credit. all we see central europe trade on credit or like a rates market? one or the other? >> i think once the exit becomes clear, it will trademark like a rates market based on fundamental. jonathan: but it is going high regardless? up on the program, we will walk you through the final spread but before we get there, here to check on the market yields. what a move on the tenure

treasury. so far. points 16 on the 30-year. as steeper curve. bank of england, a preview of the week to come next. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the final spread. coming up over the next week, we get a rate decision from the bank of england with boe governor mark carney delivering that. also, ecb president mario draghi delivering his report to the european parliament, his annual report. we get another round of earnings including tesla, and once again, there is the potential for another u.s. government shutdown, which most investors have become desensitized to at this point. with me now is lisa, kevin and eric.

lisa, we were talking about central bank decisions before the break and what this means for peripheral europe and the ecb. one thing that people have not started thinking about in a big way yet and rightly so because it is a 2019 story, is who runs the ecb next? i'm surprised by how governor kuroda is to the bank of japan. the next person that takes over from ecb president mario draghi will have some big shoes to fill. when you start thinking about the ecb post-draghi? lisa: i told you i am short btp's. jonathan: so you're hoping it is a german who takes the top spot? lisa: 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 low rates, etc. it is a totally different set of members as well. it is a different cast of characters, so we are looking forward and we are trying to make expectations based on what they are telling us.

it is a whole different fed this year and it could be a whole different ecb next year. jonathan: kevin, let's think about it. you are at the bloomberg terminal one morning and the headline says he is the next president. do you react to that, should you respond to that? kevin: not immediately but i think there may be a shift in focus. much like it has been a pro-usa or pro-america focus since donald trump was elected, that 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. jonathan: could you imagine the damage that would be done to the eurozone economy if you have an aggressive repricing of sovereign yields and credit, because mario draghi was gone, and let's say you have more of a conservative central banker in the hot seat? why would they want to do that anyway? eric: you bring up a good point. certainly, wiseman has a different view on the world as

-- than draghi. 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, then it would matter a lot. i like to go back and play the hindsight game. if he had been there, would he have done the draghi speech in 2012? knows?ually in a 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. jonathan: he was busy hiking rates, wasn't he, when maybe he should have been cutting them. guys, great to have you with me. we will wrap things up and go to the final spread. to the rapid fire round, where i ask you a quick question, and a quick reply if you can. lisa, kevin and eric. we begin with the selloff in treasuries as we approach 3% on 10-year.

do you fade the reflation trade, or accept that 3% is coming on the u.s. 10 year? lisa: buy at 3%. kevin: definitely buy at 3%. eric: i accept that it is coming. jonathan: we talked about the bank of japan and how aggressive the boj has been, coming into the market and offering to buy a limited amount of bonds to cap 10 year yields at 0.1%. if i offered you the following decision -- buy or hold 10 year jgb's or 10 year treasuries -- lisa? lisa: treasuries. kevin: jgb's. eric: jgb's. 10-year, not 30 year. jonathan: because you are short the 30 year. we have got that. the final one, we know that lisa is short italian debt. this is the decision she has to make. italian sovereign debt or u.s. high-yield through to the year end? italian sovereign debt or u.s. high-yield. it is credit risk in europe or the united states. lisa: neither one of them,

treasuries. kevin: i will stick with high yields. eric: stick with high yields as well. jonathan: guys, it has been great to catch up with you. thank you very much for revealing some of the work you have been putting on in the last couple of months. lisa hornby, kevin giddis, and eric stein. that does it from new york as the selloff continues in equity and treasury. we'll see you next friday at 12:30 p.m. new york time. 5:30 p.m. in london. this was "bloomberg real yield." this is bloomberg tv. ♪

♪ david: you actually started out, you wanted to be an actor. leslie: i was sort of a mediocre actor. i was also tending bar more than i was acting during those years. david: so what was your skill set, the scripts or the talent or both? leslie: we had the hottest comedy and the hottest drama in the world on television on nbc. david: companies like netflix and apple and facebook and amazon, they're in the streaming business. leslie: money alone doesn't lead to good programming. it is tough. we're competing with companies that could eat us alive. david: when "survivor" came, that was an unusual show at the time. leslie: i said, that's the stupidest idea i've ever heard. [laughter] >> would you fix your tie, please?