leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. jonathan: from new york city and our viewers worldwide, i'm jonathan ferro with 30 minutes advocated 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 em as the trade war rhetoric fades, mexico and canada escaping tariffs. away from the political drama. capital market debt issue looks fixed up. but we begin with the jobs report. >> i thought it was a really good report. >> it is impressive. >> 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 the weakness in wages, is probably the best of the expansion because of the combination of the sheer volume of increases we saw in jobs coupled with an increase in labor force participation. >> it is great for the fundamentals, because it seems there is still a very large amount of demand for labor, but it is not causing a gigantic increase in wages. risk assetshy for 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 on this, so it should be good for rates. rates are not low at this point. they are probably at the top end

of the range, so 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, i'm 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 pretty good path. jonathan: on a pretty good path here in new york city, joining me in new york is the chief of fixed income strategies at montgomery scott, and portfolio manager at federated investors. and joining me from london, i am pleased to say is back with us is the fixed income portfolio manager at jpmorgan asset management. i want to begin with you. 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. why? >> it was not just the long end of the yield curve that was subject to inflation, it was the middle and the money markets as well. part of the reason -- reaction we have had is strong payroll numbers, a sell-off in the markets.

i think that reflex reaction is still in force. longer-term, anything that causes the federal reserve to act more aggressively will ironically compress long rates as inflation expectations come down and the fed acts concretely to supply us -- suppressed inflation expectations. 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, and this 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 a lot of the points she made. keep in mind, this is a fed member who historically tended to be quite dovish, but they are pointing to things we have been flagging. financial conditions remain very easy, at the point where the u.s. cycle is picking up and we are seeing growth accelerating. and we have this late cycle fiscal stimulus on top of that.

so while inflation is not today's story, we think it will gradually pick up and this will allow the fed to move. jonathan: that announcement probably would have topped the bond market news, but it does not because other things are happening. how pivotal is it that the doves are starting to sound more hawkish? r.j.: i think it's consistent with where the fed has been. she has been actively viewed as a dove, but i think we have seen former chair janet yellen, she became less dovish by the end of her term. multiple tightening's by the dovish core of the fomc, 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 momentum in the economy is picking up as well. r.j.: in the short term. jonathan: what do you think the

fed will deliver versus what is priced in to the front-end of the moment? 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 to the markets pricing for rate hikes. i doubt we actually get there. what it comes down is the random nature of inflation prints three in the short term. three things cause inflation to exceed our forecast, core inflation. one was a change in methodology in used car pricing. right? 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, basically 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 prints as well? if you look at the breakevens, the breakevens curve is inverted. you have breakevens further along the curve. there is a seasonality to all of

this when we start pricing in this near-term inflation pick up , every spring, every year. to the greens back shoots phenomenon in 2010, 2011. one of the things you have to consider on the front end of the tips curve is you have built in basically passed increases -- past increases in oil prices that have not quite priced into the index ratio of the tips. i know i am on the technical side. jonathan: you can carry on. guy: that tends to cause, especially past increases in oil prices that has not been reflected in the short end tip adjustment, it causes an inversion. if you normalize for that, we are not inverted, 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 a few things that are fairly different this

year from where we have been historically. let's just go back to looking at the labor market. when you look at the reports, you look at the eci, the momentum on eci data is strong, the numbers are strong as they have been for the last few years. when you look at the labor market surveys, you see strong signs that the u.s. labor market is starting to get quite tight. 22% of the participants are saying that labor shortages are the biggest constraint to their business right now. when you look at the jobs data, it also paints a very similar picture. so ultimately, we have not seen this wholesale tightening in 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. so one has to assume that when you combine these things, the risks are actually 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.

bill: 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 expects . a 10 year at 2.87 is probably positioned for 2.25% on fed funds, not well-positioned for 2.5% to two point 75%. -- 2.75%. r.j.: we are more on the bearish side. the fed is an upward trajectory, the inflation risks are fueled by a weaker dollar and rising commodity prices. i think we are heading higher than what bill gross suggested. i would not be shocked if we break three on 10, it would be tough to do. 2.95, butt gone abov 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 the u.s. 10 year, is it safe to say the consensus at the moment is we might be nearly top end of the range on the 201810 year yield? -- 2018 10 year yield? 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, that three, 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. completing these third-largest corporate bond sale ever 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 now, where jcpenney has given more funds and time to survive in the ever-changing retail industry. the company sold $400 million of bonds which will allow it to buy back some debt. that matures starting next year. jcpenney has reduced outstanding debt by more than $600 million in the last 12 months. the big headline of the week is cvs as it completes the third largest corporate bond sale on record. it issued $40 billion of an this isnt-grade debt -- a nine part offering. -- are our guests.

it is great to have you with us. r.j., i want to begin with you and get to the issuance from cvs. the remarks were still there, and that issuance rallied when it came to market. is this that phenomenon we have talk -- to talk about, like the more the offering, the bigger demand because it makes up so much of the index? r.j.: it suggests you may overweightse names, or underweight, and cvs has a large composition of the index. i think it is some of that, but it is also market reception. the market is buying into the fact that 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. and it was a healthy test for the market, spreads have been volatile of late. it's good to see the deal get done, be well received, it got bumped versus initial talk, then it traded up in the secondary issuance. jonathan: diana, despite all the drama that a lot of people have been obsessing 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 rock-solid, open for business if you want to bring debt to 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. actually, in the u.s. ig space, we have noticed issuance is a -- is lagging what it was last year. we are still below last year's numbers in the primary issuance space. so it was quite refreshing to see a big new issue come through the market and actually trade well after. but this issuance trend is also apparent in emerging markets . when you look at de am sovereign space, we have a lot of new issues coming in from sub-saharan africa, on the frontier space. decent sized issuers, which the market was happy to go into, and they had traded well subsequently. jonathan: do you see the issuance story continue to pick up? it was a big story last year, particularly in investment grade.

and a lot of people looking at this year are wondering after the tax bill comes through, if issuancedown, if debt full stop slows. what is your view as 2018 progresses? guy: there are a handful of names that are going to slow. ironically they are already in u.s. dollar bonds. so they are clearly going to be absent for the next 12, maybe even 24 months for the most part. also, when you see some of the other sectors that are more forward focused on the buyback arena and the debt maturity schedules coming up, i think issuance generally speaking with -- will be a good 5% to 10% lower in 2018 than it was in that is not a message move. 2017. demand is still there. what will concern me is when we get that maybe $2 billion, not a massive deal -- that price is basically on the screws with no concessions versus outstanding debt and trades wider weaker in , the secondary market. that will be the signal that this relatively open capital

market situation is closing down. jonathan: rj, the moment you don't see much weakness holding credit, despite the fact that we are seeing a pickup in treasury yields and projections from diana about four hikes from the fed, the credit is still pretty decent. 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, for high-yield versus investment great corporate's, generally speaking. when you look at investment grade securities of any type of fixed income, you have negative returns on the year. jonathan: triple safe and high-yield are the ones that are doing well. r.j.: exactly. if yields are rising and the fed is normalizing because corporate profits are growing, the economy is expanding, it makes some sense to put some credit risk in your portfolio to get better relative returns. as interest rates rise, the magnitude of absolute returns may be modest, but the relative returns to credit risk still seem attractive. we have peeled back a little bit, but we still like the space. jonathan: when rates were low,

the argument was do you go further along the curve to pick up yield or further down in credit quality? we caught up from rick reider from blackrock earlier about what would happen to credit as the treasury yields and fed fund rate continues to climb. rick: 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 can carry , particularly on the front-end, where you can refinance yourself at negative rates sometimes. jonathan: diana, a big conversation over the last few weeks as to whether you get that competition for capital elsewhere from high treasury yields from the front end, high rate fed funds in the future as well. whether that starts to compete for capital in credit. or specifically, that credit risk people have been reaching for to get that yield, whether you have to reverse the thinking as rates creep higher. what are your views? diana: we look at it from a global point of view as international investors.

so you have to take a step back and think at this point in the cycle, who are the marginal buyers? yes, u.s. investors will be very active buying the space, but from a global perspective the move is coming from the ecb, boj, the rest of the world at this particular point in time. when you are thinking as an offshore investor, looking at the u.s. curve and the unclear view on the dollar, does fiscal widening mean you get a weaker dollar, and what does that mean for your 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 do think that yes, the front-end is very appealing now. veryet rates of 1.75, in

tight money tech products. that will give investors comfort at a point where the -- is here, 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. -- ourn: dian guests staying with us. in the markets so far this week, 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 2.90 and 2.89, and 3.19, and inch high. by one basis point -- in qinghai by one basis point. -- and inching high by one basis still ahead, the final spread point. 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."

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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. treasury. they will be selling 3, 10 and 30 year notes, and angela merkel will be inaugurated in her fourth term as chancellor. the european central bank's president mario draghi speaking and we get the latest read on u.s. inflation. the cpi number -- must watch, apparently. still with me are our guests. diana, 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 -- prove to be so resilient to the rhetoric around a trade war with the united states and everyone else? diana: so 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 have been announced on steel and aluminum are not that large. two, in the commodities space, china is the largest consumer of commodities. so for a lot of emerging markets, what happens to china is a lot more of a bigger driver on the outlook than just the u.s. and i think the last thing is, we don't know if there is any retaliation. so we are not yet at the point where it is a war. i would say 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. but ultimately, historically when the u.s. has increased revenues from trade tariffs, it is standard to coincide with a weaker dollar. so we are seeing some of that dynamic benefiting some of the emerging market currencies as well. jonathan: it is an interesting point, rj, this relationship between the u.s. dollar and emerging markets. at a time when you would think

actually em would get hit, all it has meant is the dollar has gotten weaker and therefore em , will be ok. front and center at the moment, it seems to be dollar and dollar weakness. r.j.: right, right. the twin deficit story, a phrase we started using way back in the 1980's, it seems to be back. you are cutting taxes, you are increasing spending. at this point in the economic cycle, that is unfriendly for the dollar. i think despite the rate dynamic, it is dominating to some degree. -- inan: guy, is that the the emerging markets, not just the fundamentals, the strong composition of the overall index, now weighted towards tech less towards commodities, financials are looking better, but it is dollar weakness. that seems to be the cushion for em. guy: the dollar is the one factor model in the financial universe right here. dollar weakness means higher rates, dollar weakness means a potential for the fed to act more aggressively, it means the existenceand

of an em outperformance. that is the one model factor of the universe right now. jonathan: i want to get your final thoughts in the rapidfire round. we want to look at the last week -- the next week and some of this week as well. i will begin with a couple of questions. the first one, is reflation euphoria seasonal or is it different this time? guy: no it is not, it is 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. we are not taking off and 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? have we seen the low on the 10 year yield in 2018? yes or no. guy: absolutely not. r.j.: i disagree, i think we have probably have seen the low and we are headed higher from here. we will break the 3% little -- level and settle in the low threes over time. diana: i agree with the high as well. we might get a period of

consolidation, but the trend is higher rates. jonathan: the trade war talk dominated the news last week and for markets as well. but if you had to hold one thing going into year end, what it the u.s. credit or emerging-market credit? u.s. credit or em credit? guy: u.s. credit. r.j.: i would be on u.s. credit as well. diana: emerging-market credit. jonathan: there we go. to wrap things up, a little bit of disagreement. thank you to our guests. 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, 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 rewards and risks 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 flow into financials. join the crowd. american century, the latest big asset manager to enter the ecf space. edward rosenberg, a veteran of -- etf space. edward rosenberg, a veteran of vanguard, explains the strateg