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 says mexico and canada escaping tariffs. away from the trauma, capital market debt issue looks fixed up. but we begin with the jobs report.

>> i thought it was a really good report. >> impressive. >> a near-perfect report. >> it is probably the case that the headline of tremendous jobs report will be tempered by low wages. >> the overall report, despite the weakness in wages, is >> i thought it was a really probably the best of the expansion because of the volume of increases we saw in jobs coupled with an increase in labor force participation. >> 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 was we could get more productivity, i think we will with capex picking up. >> you have a long way to run. the fed can be slow-moving. it should be good for rates. 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 the chief fixed-income strategist at montgomery scott, and portfolio manager at federated investors. and joining me from london, i am pleased to say is back with us fixed income portfolio manager at jpmorgan asset management. i want to begin with you. jonathan: on a pretty good path in the immediate aftermath of the payrolls report, treasuries on offer, yields up. not what i would expect with such a disappointing wage growth figure. >> it wasn't the long end of the yield curve that was subject to inflation, it was the middle. part of the reason -- reaction we have had is strong payroll the markets.off

longer-term, anything that causes the federal reserve to act more aggressively will ironically compress long rates as inflation expectations come the markets. down in the fed acts concretely. jonathan: is there anything to suggest we get a more aggressive federal reserve? >> we still think we are likely to get four hikes from the fed this doesn't really change that view. we noticed during the week, we had a fed governor 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. a cycle is picking up and we are seeing growth accelerating. we have this late cycle fiscal stimulus on top of that.

today'sflation is not story, we think it will gradually pick up and this will allow the said to move. jonathan: how pivotal is it that the doves are starting to sound more hawkish? >> i think it's consistent with where the fed has been. i think we have seen former chair janet yellen, she became less dovish by the end of her term. multiple tightening setting the 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 of 2.6 still ahead of the inflation rate and gradual monetary policy normalization, they can stick to that script. jonathan: and the economy is picking up.

what is the fed ultimately going to deliver? guy: the euro-dollar markets are basically pricing in two and a half to three rate hikes for the year. i am willing to bet we move toward market pricing. what it comes down is the random nature of it. three things cause inflation to exceed our forecast, core inflation. one was a change in methodology in used car pricing. it doesn't get much more random than that. 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 that 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? breakins in curve is inverted. there is a seasonality to all of

this when we start pricing in inflation pick up, every spring every year. r.j.: it goes back to 2010, the green shoots phenomenon. one of the things you have to consider on the front end of the tips curve is you have built in basically --past increase in oil prices that have not quite priced into the index ratio of the tips. i know i am on the technical side. that tends to cause, especially past increase in oil prices that has not been reflected in the short end tip adjustment, it causes an inversion. we are flat on the tips curve. we are not really inverted. jonathan: diana, it raises the point, if we get excited about reflation every spring, does this story fade as the year progresses? why is this year different than years gone by? why does inflation continue to pick up from here? diana: there are few things that

are different from where we has been historically. looking at the labor market. when you look at the reports, you look at the eci, the momentum on eci data is strong, as they have been for the last few years. labor market at surveys, 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 have not seen 22% of the participants are this wholesale tightening the labor market in the u.s. we're seeing right now. secondly is the fiscal stimulus. you are getting this fiscal stimulus 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. take a listen to what he had to

say about when next for the 10 year yield. >> i think we will see fed funds somewhere around 2% or 2.25% ass opposed to 2.5% or 3%, which is what the market expects until a tenure at 2.87 is probably positioned. not well-positioned for 2.5 to 2 and 3/4. resonate with you? r.j.: we are more on the bearish side. the fed is an upward trajectory, the inflation risks are fueled by weaker dollar and rising commodity prices. i think we are heading higher than what bill gross 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 break the 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 for 2018? guy: absolutely. the short-term trading range we are looking at, most fall into this camp. 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 us, rj and diana. coming up on this program, it is the auction block. the third-largest corporate bond sale on record. that conversation is next. this is "bloomberg real yield." ♪

jonathan: from new york, i am jonathan ferro and this is "bloomberg real yield." i want to head to the auction block, where jcpenney has given more funds to the ever-changing retail industry. the company sold $400 million of bonds which will allow it to buy back some debt. jcpenney has more than $600 debt inin outstanding the last 12 months. the big headline of the week is cvs as it completes the third largest corporate bond sale on record. the high-yield drawing investor demand spirit still with me is from j.p.nd diana

morgan asset management. rj, i want to begin with you and get to the issuance from cvs. that issuance rallied when it came to market. that phenomenon we have the more offering, the bigger demand? r.j.: it suggests you may and cvs or underwait, has a large composition of the index. it is market reception. cvs is in a transitional phase. they are becoming less of a retail company and more of a health care company. i think that vision is attracting investors. it was a healthy test for the market, spreads have been volatile. it's good to see the deal get done, be well received, it got bumped versus initial talk, then traded up in the second. . jonathan: diana, despite all the drama that a lot of people have

been assessing 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 both issuers and investors, it sends the right signal. in the u.s. ig space, we have noticed issuance is a lagging what it was last year. we are still below last year's numbers in the primary issuance space. it was quite refreshing to see a big new issue come through the market and trade well after. this issuance trend is also apparent in emerging markets good when you look at the em sovereigns. we have a lot of new issues coming in from sub-saharan africa. , on the frontier decent sized issuers, which the market was happy to go into, they traded well subsequently. jonathan: do you see the issuance of story continue to pick up, it was a big story at last year particularly in investment grade. a lot of people are wondering

after the tax bill comes through, if it slows down debt issuance. what is your view as 2018 progresses? there are a- guy: handful of names that are going to slow. ironically they are already in u.s. dollar bonds. they will clearly 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 generally speaking with the a good 5% to 10% lower. that is not a message move. 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. get that maybe $2 billion, not a massive deal, that prices that will be the signal that

this relatively open capital market situation is closing down. jonathan: 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, the credit is still pretty decent. people are not pivoting away from high-yielding assets to the the safer treasury market with a higher treasury yields. 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 get better relative returns. look at investment grade securities of any type of fixed as interest rates rise, the magnitude of absolute returns may be modest, but the relative returns to credit risk still seem attractive. we still like the space.

jonathan: do you go further along the curve to pick up yield or further down in credit quality? we caught up with someone from blackrock earlier about what would happen to credit as the treasury yields and fed fund rate continues to climb. >> i think the front end does take capital away from 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 cane carry particular on the front end, where you can refinance yourself at negative rates sometimes. jonathan: diana, a big conversation of the last few weeks over the the you get competition from high treasury yields from the front end, high rate fed funds in the future as well. onther on the curve sovereigns, tha currentt -- that credit r -- 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 do 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, is not that clear that it is probably the way investors need to think about markets. we think the front end is very appealing in the u.s. now. give some investors

concern -- it will give comfort -- but i tend to agree with what has been said already, ultimately growth is still very attractive and should support risk assets and see spread tightening in select spaces. jonathan: diana, staying with ut spaces. jonathan: diana, staying with us from j.p. morgan asset management along with scott and rj. in the comfor markets so far th, what a week, treasuries look like this. yields up two basis points on a 2-year note. we creep higher on the 10 year. getting back to 289, and 319, and inch high. 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 just 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. coming up over the next week, another round of offerings from the u.s. treasuries. they will be selling 3, 10 and 30 year notes, and angela merkel will be inaugurated as fourth term as chancellor. mario draghi speaking and we get the latest read on u.s. inflation. the cpi number. must watch, apparently. guy, scott, diana and rj. in a week where there is obsession over what would and wouldn't happen with international trade, seemingly em is ok. why did emerging markets proved to be so resilient to the rhetoric around a trade war with the united states and everyone else? diana: i think 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 tarrifs are not -- the tariffs on steel and aluminum are not that large. two, 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 yet 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 sees a -- it is standard to coincide 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 the em 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, you are increasing spending. at this point in the economic cycle, it is unfriendly for the dollar. despite the rate dynamic, it is dominating to some degree. jonathan: not just the fundamentals about emerging markets, the strong composition of the overall index, now waited towards tech and less against commodities. but dollar weakness seems to be the cushion for em. guy: the dollar is the one factor model in the financial universe. dollar weakness means higher rates, dollar weakness means potential for the fed to act more aggressively, it means potential existence of an em outperformance. that is the one model factor of

the universe right now. jonathan: time for the rapidfire round. we want to look at the last week and sum up this week. i will begin with a couple of questions. the first one, is reflation euphoria seasonal or is it 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. we will settle in the low threes over time. diana: i agree with the high as well. the trend is higher rates. jonathan: the trade war talk

dominated the news last week and for markets as well. if you had told one thing going the u.s. end, what it credit or emerging-market 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 disagreement. r.j., and discussed. 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 york. this is bloomberg tv. ♪ york city. we will see you next friday at a

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