♪ jonathan: i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, a goldilocks jobs report, monster payrolls growth without the inflation shock. positive news for ian, as the trade war rhetoric fades. mexico and canada escaping tariffs. debt issuers fixed up. but we begin with the jobs report. >> i thought it was a really good report. >> impressive. >> it's a great number. >> a near-perfect report. >> it is probably the case that

the headline of tremendous jobs report will be tempered by low wages. >> i would say the overall report, despite initial wages, is probably the best of the expansion because of the volume of increases we saw in jobs coupled with an increase in labor force participation. >> it is great for the fundamentals. it seems there is still a large amount of demand for labor, but it is not causing a gigantic increase in wages. >> the reason why it is a good number, you are not getting the wage acceleration, the fed will not be in any rush around this number. >> i wish we could get more productivity, i think we will with capex picking up. it will allow rage growth to pick up some. -- it will allow wage growth to pick up some. >> it should be good for race, rates are not low right now. a good number at a good time. >> even though the job market is strong, we have not seen really

strong wage growth. i'm looking forward to stronger wage growth in the future, looking forward to all of these things leading to a stronger economy and stronger inflation more in line with our 2% inflation objective, i think we are on a good path. jonathan: on a pretty good path here in new york city, joining me in new york is guy labas, chief fixed-income strategist at montgomery scott, and r.j. gallo, portfolio manager at federated investors. joining me from london, diana amoa, fixed income portfolio manager at jpmorgan asset management. guy, i want to begin with you. in the mid-aftermarket payrolls report, treasuries on offer, yields up. not what i would expect. why? guy: it wasn't the long end of the yield curve that was subject to inflation, it was the middle. part of that is reaction to

payrolls numbers is strong payrolls numbers, selloff markets. i think that reflex reaction is still in force. anything that causes the federal reserve to add going to compress long rates as inflation expectations come down in the fed asked concretely. jonathan: is there anything to suggest we get a more aggressive federal reserve? diana: we still think we are likely to get four hikes from the fed this year. this payroll number doesn't really change that view. we noticed during the week, we had a fed governor's comments coming out and we have a lot of sympathy with the points she made. keep in mind, this is a fed member who historically tended to be dovish, but they are pointing to things we have been flagging. financial conditions remain easy, at the point where the u.s. cycle is picking up and we are seeing growth accelerating. we have this late cycle fiscal stimulus on top of that.

while inflation is not today's story, we think it will gradually pick up and this will allow the fed to move a four -- luke four times this year. jonathan: how pivotal is it that the doves are starting to sound more hawkish? r.j.: a think it's consistent with where the fed has been. while she is viewed as a dove, i get that, i think we have seen janet yellen, she became less dovish by the end of her term, multiple tidings by the dovish core setting baton tone for the leadership going forward, which will be gradualism. i think this employment report is up their alley. inflation is building but slowly, average hourly earnings still ahead of the inflation rate and gradual monetary policy normalization, they can stick to that script. jonathan: momentum in the economy is picking up. what do you think the fed is theg to deliver versus

front at end -- the front end at the moment? guy: the euro-dollar markets are basically pricing in two and a half to three rate hikes for the year. i think we should move to the market pricing for rate hikes, i doubt we get there. what it comes down is the random nature of inflation in the short-term. three things cause inflation to exceed our forecast, core inflation. one is a change in methodology in used car pricing. it doesn't get much more random than that. [laughter] guy: i am willing to bet that on the flipside, we get some data over the course of the next six months or so that is randomly lower than expectations for small, meaningless reasons and it forestalls the fourth rate hike, even if the markets price it in. jonathan: can we talk about the seasonality of some of the inflation as well? the break even curve is inverted. you have front of break evens higher than breakevens further along the curve. there is a seasonality to all of this when we start pricing in

near-term inflation pick up, every spring, every year. back to the green shoots phenomenon in 2010. one of the things you have to consider on the front end of the tips curve is you have built in basically passed increases in oil prices that have not quite priced in index ratio of the to the tips. that tends to cause, especially when there is a past increase in oil prices that has not been reflected in the short in tip -- short endtips tips adjustment, it causes an inversion. we are flat on the tips curve. jonathan: diana, it raises the point, if we get excited about reflation every spring it, does this story fade as the year progresses? why is this your different than years gone by?

why does inflation continue to pick up from here? diana: there are few things that are different. the first one is, let's go back to looking at the labor market. when you look at the reports, you look at the eci, the momentum on the data is strong, the numbers are strong, as they have been. when you look at nfib, you see strong signs that the u.s. labor market is starting to get quite tight. 22% of the participants are saying labor shortages are the biggest constraint to their business right now. when you look at the jobs data, it paints a very similar picture.

ultimately, we had not seen this wholesale tightening the labor market in the u.s. we're seeing right now. secondly is the fiscal stimulus. you get this at a point where the u.s. is in the late cycle. one has to assume that when you combine these things, the risks are to the upside when looking at u.s. inflation. jonathan: what are the risks for treasuries? we caught up with bill gross. >> i think we will see fed funds somewhere around 2% or 2.25% as opposed to 2.5% or 3%, which is what the market expected a -- the market expects, so a 10-year at 2.87 is probably perfectly positioned, not positioned for 2.5%. jonathan: how does that resonate with you? r.j.: we are more on the bearish side. the fed is in an upward trajectory, the inflation risks are fueled by weaker dollar and rising commodity prices. i think we are heading higher than what he suggested. would not be shocked if we break three on 10, it would be hard to do. but we think as the year unfolds, we will end up in the low three range. we are not more extreme more bearish than that. jonathan: to get outside of the argument as to whether we raked -- whether we will -- whether we

break this magic 3% on u.s. tenure, is it safe to say the consensus at the moment is we might be nearly top end of the range on a 10 year yield? guy: absolutely. the short-term trading range we're looking at, drifting on the top end of the range, we have not bounced off of it. i am willing to bet we do bounce off of the top end of the range, the 3.05 area, right around the time we see a four dot medium. jonathan: you are sticking with me, guy, rj and diana. coming up, the auction block, cvs completes the third-largest corporate bond sale on record. that conversation, next. this is "bloomberg real yield." ♪ ♪

jonathan: from new york, i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now where jcpenney has been given more time and more funds than ever in the changing retail industry. they have sold bonds that would allow it to buy back debt. they have more than $600 million outstanding debt. the big headline of the week is cvs as it completes the third-largest corporate on sale -- corporate bond sale on record. still with me is guy labas, r.j. gallo, and diana amoa. it is great to have you with us.

r.j., i want to begin with you and get to the issuance from cvs. that issuance rallied when it came to market. is this a phenomenon we have to talk about where the bigger the offering, the more demand for it, because it makes it more the index? r.j.: it suggests you may overweight or underweight and cvs will have a large composition of the index. they are becoming less of a retail company and more of a health care company. i think that vision is attracting investors, and i think it was a healthy test for the market, spreads have been volatile as of late. it's good to see the deal get done, be well received, it got bumped and then it traded up in the secondary. jonathan: diana, despite all the drama that a lot of people have been obsessing over over the last week about who is in the white house and who is out and what happens with international

trade, capital markets have been rocksolid, open for business, if you want to bring debt market, haven't they? diana: yes, they have. i think the cvs deal is a good example. for issuers and investors, it sends the right signal. in the u.s. ig space, we have noticed issuance is a lagging last year. it was quite refreshing to see a big new issue come through the market and trade well after. but this issuance trend is also apparent in emerging markets . when you look at the em sovereign space, we have a lot of new issues coming in from sub-saharan africa. prime issuance that the market was happy to go into, they traded well. jonathan: do you see the issuance story continue to pick

up, because it was a big story at last year, particularly in investment grade. a lot of people are wondering after the textile comes through, if it slows down debt issuance. guy: it is clearly going to slow. these are the large tech companies with tens of billions, hundreds of billions stopped over asset managers in london and belgian, they are already in u.s. dollar bonds. they are clearly going to be absent for the next 12 or 24 months for the most part. also, when you see some of the other sectors that are more focused on the buyback arena, i issuance will be 5% or 10% lower. it is not a massive move, but demand is still there. what will concern me is when we get that maybe $2 billion, not a massive deal, that prices basically on the screws with no concessions versus outstanding debt and trades weaker in the secondary market. that will be the signal that

this relatively open capital market situation is closing down. jonathan: at the moment you don't see much weakness holding credit despite the fact that we are seeing a pickup in treasury yields and directions from diana, four hikes from the fed, people are not pivoting away from high-yielding assets to the safer treasury market with a higher treasury yield. r.j.: we've seen outperformance, generally speaking, when you look at investment grade securities of any type of fixed income, you have negative returns on the year. if yields are rising and the fed is normalizing because corporate profits are growing, the economy is expanding, and make sense to -- expanding, it still makes sense to get better relative returns. as interest rates rise, the magnitude of absolute returns may modest but the relative returns to credit risk still seem attractive. jonathan: do you go further

along the curve to pick up yield or further down in credit quality? we caught up with blackrock earlier about what would happen to credit as the fed rate continues to climb. take a listen. >> i think it does take capital away from other parts of the curve. you can carry extremely well on the front end of the yield curve, you don't have to take five-year credit risks, you can carry particular parts of the front end where you can finance yourself at negative rates at times. jonathan: diana, a big conversation over the last few weeks about whether you get competition from high treasury yields of the front in, high rate fed funds in the future as well. further on the curve for sovereigns. do you have to reverse the thinking as rates creep higher? what is your view? diana: we look at it from a global point of view as international investors.

you have to take a step back and think, at this point in the cycle, who are the marginal buyers? u.s. investors will be very active in the space, but actually, from a global perspective, the marginal central bank buying is coming from the ecb, the boj, the rest of the world at this particular point in time. when you're thinking as an offshore investor, looking at the u.s. government and the unclear view on the dollar, two you get a weaker dollar and what does it mean for currency exposure? when you look at u.s. rates on a hedge basis for foreign investors, it is not that clear that probably the way investors need to think about markets. we do think the front end is very appealing now, you get rates of one to three quarters in front end money market type products. it will give investors concern.

but i tend to agree with what has been said already, ultimately growth is still very attractive and should support risk assets and see some spread tightening in select spaces. jonathan: diana, staying with us alongside guy labas and r.j. gallo. in the market spreads so far this week, what a week, treasuries look like this. yields up to basis points on a 2-year note. we creep higher on the 10 year. still ahead, the final spread and the week ahead featuring a fresh reading on u.s. inflation. we will bring you the week ahead in a moment. you are watching "bloomberg real yield." ♪ ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield," and it is time for the final spread. in the next week, another round of offerings from the u.s. treasury, they will be selling 3, 10 and 30 year notes, and angela merkel will be an -- will be inaugurated to a first term as chancellor. inaugurated to a fourth term as chancellor. mario draghi speaking and we get the latest read on u.s. inflation. the cti number. must watch, apparently. still with me, guy labas, r.j. .allo, and diana amoa in a week where there is up session over what would and wouldn't happen with international trade, seemingly em is ok. why do emerging markets proved to be so resilient relative to the rhetoric around a trade war with the united states and everyone else? diana: there are a couple of things at play here. one, the trade that has been announced so far, the impact on

emerging markets is fairly marginal, so the tariffs, their impact is not that large. in the commodities space, china is the largest consumer of commodities. in emerging markets, what happens to china is a bigger driver on the outlook than just the u.s. the last thing is, we don't know if there is any retaliation. we are not at the point where it is a war. it is more of the u.s. has made an announcement and we are waiting to see whether there is any fallout from the rest of the space. ultimately, historically when the u.s. has increased revenues from trade tariffs, it coincided with a weaker dollar. we might see some of that in emerging-market currencies as well. jonathan: it is an interesting point, the relationship between u.s. dollar and emerging markets, at a time when you

would think em would get hit, all it has meant is the dollar has gotten weaker and ian will be ok. front and center at the moment, it seems to be dollar and dollar weakness. r.j.: the twin deficit story, a phrase we started using in the 1980's, it seems to be back. you are cutting taxes, increasing spending. at this point in the economic cycle, it is unfriendly for the dollar. despite the rate dynamic, it is dominating. jonathan: not just the fundamentals about emerging markets, the strong position of the index is weighted more toward tech now. financials are looking better. dollar weakness seems to be the cushion for em. guy: the dollar is the one factor model in the financial universe right here. dollar weakness means potential for the fed to act more aggressively, it means potential existence of an em outperformance.

that is the one factor model in the universe right now. jonathan: i want to wrap things up and get your final thoughts in a quick rapidfire round. we want to look at the last week and sum up this week. we will start with a couple of questions. the first one, is reflation euphoria seasonal or different this time? guy: no, a feature of slower population growth. r.j.: i disagree, i think reflation is happening but it will reflate to a lower level than history and not having hyperinflation problems. diana: it is here this time. jonathan: are you confident we have seen the low of the 10-year yield in 2018? guy: absolutely not. r.j.: i disagree, i think we probably have seen the low and we are headed higher from here and will break the 3% level. diana: i agree with the high as well. from here, we might get consolidation, but the trend is for higher rates.

jonathan: the trade war talk dominated the news last week and markets. if you had to hold one thing going into year end, would it be u.s. credit or em credit? guy: u.s. credit. r.j.: u.s. credit as well. diana: emerging-market credit. jonathan: there we go. to wrap things up, a little bit of a disagreement. diana amoa, guy labas, and r.j. gallo. that does it for us from new york city. we will see you next friday at a special time, 11:30 a.m. in new new york, 3:30 in london. this was real yield. this is bloomberg tv. ♪

scarlet: i'm scarlet fu. this is "bloomberg etf iq," where we focus on the assets, risks, and rewards of exchange traded funds. ♪ scarlet: the prospect of higher u.s. interest rates is prompting a rush of money into funds focused on banks and other lenders. we take stock of the flowing to financials. join the crowd. american century the latest asset manager to enter the etf space. edward rosenberg, a veteran of vanguard, explains the strategy behind the firm's value funds.