jonathan: from new york city for our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ , isthan: coming up goldilocks a fairytale? the beginning of the end for the good times and credit. recent issues and some looking ahead of the news conference for another rate kite. we begin with the big issue which is goldilocks, is it a fairytale? to see bigble

increases in labor force without seeing a big push and wages. at some point, that ends. when that starts to end, we will see a reaction to the bond market. inflation has inertia on the down and upside. >> the fed is going to have to pick up the baton and say we are responsible for the evening against the economy so we do not get inflation spiral going. that is going to create complications as the market has to start repricing for rate increases. >> a little inflation, not so bad, but it is a slippery slope. that is the big worry in the bond market. jonathan: is the genie out of the bottle? >> it is not yet, but it is knocking. is then: joining the global head of fixed income, and dove peebles.

the issue of goldilocks, retail stocks fell for a third month. it does not pay the picture everything is ok in the u.s. economy. kathy: i think what we are seeing is the normal replenishment that we see, particularly in credit card debt. there is a tendency to recoup. in general, job growth is good and that is what drives it. say, bob,let's just are things as good as they are expected to be? bob: things are awesome right now. look at small business optimism. the second highest rating in history. highest reading was

september 1983, and that was during the reagan reform years. you look at wage gains which are picking up your you look at central highest reading banks wy slow and gradual and normalizing at a pace that we in the markets can easily absorb. jonathan: dove peebles? people are looking in the wrong spot. we don't have core pce. the inflation has been in asset prices. everybody thinks that is a great thing. as au define goldilocks buoyant economy, which i agree with bob, we have a buoyant economy in the u.s. and globally. we have very little pressure's on consumer prices. we do have asset prices that are robust. bank sees theal asset inflation pay why are we fighting this? why don't we embrace the ecb? they have moderate growth, inflation, asset prices

inflating -- why change interest rates? let us enjoy it until it spills over into the real economy. doug: how to that work for japan? bob: it did not work out well. they have asset inflation going on. have often yield control. it is spilling through. jonathan: the 10 year on tuesday was traded and it killed the market. bob: 0.0. kathy: asset price inflation reaches a price where it is dangerous. jonathan: are we there? we arein some markets close. it is always in how do you time it. how high does the rate have to go to get there? i would argue we are not there yet because it is lower than inflation. michele? bob

see the interested to economic projections come out. i think it will just higher. it is a negative real yield. they are not interested in normalizing, and for us in the markets, that is great. jonathan: you all agree that things are great. what isn't in the price? the consensus is to get short treasuries. when you put that against the .ield bob: we should have seen it by now. why aren't we to 50 to 60. it is because you have the central banks continuing to run down the balance sheet, particularly the fed. there is an incremental amount of selling going on. you have a lack of flow coming

in overseas because of cross currency basins -- basis has shifted. if the short race were a problem, we would see rates lower. we have not seen rate lower. i agree with that. the ecb is doing 30 billion euro a month. you see the impact on the bond market.- bund when you see the bund market s, you see them wider. of pricing sensitive buyers impacting markets has not gone away. bob: the magnitude has declined of new money being printed into the economy. by october, it turns into net contraction.

doug:: will have to see what that actually means. jonathan: kathy, do you see that in october and is it something to worry about? kathy: it is something to worry about. graduallylowly and and as that happens, i am keeping an eye on the dollar because i think the currency market has been ahead of all the other markets in the cycle and could start to move up in the dollar and that could single -- signal further tightening. jonathan: do you see a catalyst for that? should be higher, but clearly we have supply problems in terms of the u.s. market both in terms of deficits and trade balance. with a lot of political uncertainty as well. dollar argue that the probably has room to move up. jonathan: another flashpoint has .een a push

what is going on here? bob: we look at the overnight index swap basis. there is tremendous issuance of and that the weight on the market. you also had repatriation of foreign cash. a lot of tech and pharma companies that had cash trapped overseas brought it back and liquidated short-term. that put more pressure on the market. on top of that, you have cross currency shifting. it is not as attractive for foreign investors. jonathan: kathy? kathy: i would agree 100%. it is not signaling tanks are having trouble finding .hemselves keeping an ion that, as a goes up, it does drive the cost up for lending in the united

states, and that is a concern. jonathan: doug? . keeping an ion that,doug: i woue thing. often times we tend to discount that the price move doesn't matter at this time because we have ways to explain it away. all of the sudden you look back and say you should have believed them. states,: in the united there is something going on in the front end with high yields. you wonder and we have this conversation in the last couple weeks, how does it compete in a significant way. bob: it is indicating that the notion of capital is wanted by the real economy, which it has not wanted for a long time. the financial markets will have to compete with that. that shows up in price or yield. take profit and asset class, you have a place to put your money and generate a return. it is trading competition.

jonathan: kathy, finally. kathy: you are seeing dividend payers losing ground because the book and strip with much shorter duration and whiskey asset -- less risky asset. kathy come about, and john. coming up, the auction block. the offerings this week. this is bloomberg. ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." a recent diplomatic spat between the united kingdom and the rest

of the western world. russia will almost double the $4 billion on the yield on the 11 your notes. another round of treasury offerings. $223 billion. for 10 yeardemand notes fell to the lowest level since 2009. in the credit market, campbell soup sold $5.3 billion to fund an acquisition. bonds did not narrow through execution and weakened after they were sold. bob michael is still with me, kathy johns -- kathy jones, and doug peebles also. a secondary market continue to rally. that did not happen with campbell soup. they said maybe it is the beginning of the end for investment grade. what is your view?

doug: it is nonanonymous switch, but they are slowing significantly. the liquidity that was available 12 months ago is a different level of liquidity now. it is a dimmer. we do not expect to see light out at any point in time. markets are behaving today more normal than they were 12 months a name and a concession in the marketplace. it prices and is not trade immediately stronger. we are digesting it, and from the day after issuance till now, it is doing well. jonathan: kathy? kathy: there was a huge amount of supply and the expectation of higher rates down the road. , everyone did not believe rates were got a go up and be higher six or 12 months from now. now if you are a buyer, you have to give concessions to discount that. jonathan: it is silly something you should take some time to

look at and pay attention to pdc saw spots in investment grade? bob: i don't. it got addictive to massive flows into the market. one was asian cash. it was very attractive to the local markets. that has dried up as the u.s. yield curve has flattened. the second is a lot of the offshore cash that was trapped on balance sheets. for tax reform, that gets repatriated. the stick -- market is trying to deal with those. jonathan: we caught up with the guggenheim ceo and this is what he thinks. income, people should be dramatically upgrading the quality of their portfolios. it is time to get out of high-yield. they clones typically perform well at this phase, but at some point, you should be out of it. investment grade corporate debt, i would get out of.

jonathan: kathy jones, thoughts on that? kathy: we are not investment grade, but we have been moving up and doing that for quite some time because the spreads were narrow and the premium you got for taking credit risk was low. i would agree to some extent. the other problem is timing. you don't really know when the cycle turns until it turns rather abruptly. we think it is time to dial back the risk. today,n this market things that we worry about our liquidity and crowding. i cannot think of a better example of where we have doubled the risk been bank loans. you have a tremendous amount of people who own that asset class who frankly don't understand it well. the second thing is the liquidity is not good in that market. it is terrible. you get crowding and liquidity, and that is what we would sell.

timei don't remember a when corporate america has had more financial flexibility. i certainly wouldn't be a seller of credit here. i think the horizon looks good. when you look at credit spreads, high yield in particular, you can build a model. you have to get the expectation of default rising which is highly correlated to an approaching recession. approaching see an recession, you will see a lot of pressure on high-yield market. jonathan: if it is so good for the issuance, if corporate flexible use great, then the deal is in the investors hands? doug: by and large, no. they have an enormous tax windfall coming to them. it is not a one time. it is year after year after year. they have a lot of flexibility. doug: when you look at it today,

it is low. i'm with bob that you want to go as long as you can. but i'm also with kathy. when the time comes, the amount of oig issuance that falls -- of ig issuance falls and it will dwarf anything we have seen. jonathan: the leverage of investment grade has been picking up. that is one of the biggest concerns. you have had a huge increase of leverage on corporate balance sheets. when the moment comes when it is harder to service the debt or you're not getting paid a lot to take the risk. jonathan: are fundamentals that good? bob: the leverage is picking up. i would argue that companies did the right thing last year when they built up the leverage and accessed ultralow generational funding and returned some to shareholders. this is a new year. earnings estimates are going up.

they have tax reform windfall. they will generate earnings to cover the leverage. jonathan: in terms of the story this week, and investors can be terrible at timing. toys "r" us. say that yousy to can pick your point and look back on things and explain them away perfectly. no one saw this coming back in early september when this debt was trading close to par. us is new news. people have not been looking at bricks and mortar stores and talking about threats. jonathan: why was it trading anywhere near par in early september? bob: i don't know. doug: i am with bob. bob michael from j.p. morgan, kathy jones from charles schwab, and told peebles. i want to get a market check. treasure market 2-year note

higher by two basis points, down five on a 10 year. eight on a 30 year. the curve flattening once again in the treasury market. still ahead on this program, the final spread, the week ahead with the decisions of the fed and the bank of england. this is "bloomberg real yield." ♪

♪ the jonathan. ferro.jonathan it is a big way to come with federal reserve first conference in spain elected. plus, a -- since being elected fed chair. .he bank of china still with me about michael from j.p. morgan, kathy jones, and doug peebles.

where two stocks fall? kathy: you need for spots to move to get the medium. it is possible. assuming that powell is one of them. jonathan: doug? doug: we will certainly see some inching higher. i think the real story is the market is actually coming up. it has been a long time since we had that in place. jonathan: without much encouragement. enthusiastic was bob michael. is there some argument for leaving it at three? are more concerned in the longer term for it where is

it moving to. is it back to three or a bit higher? jonathan: is it about to shift up? pretty goods growth. the labor market looks tight. why not start to get back up to a level that looks more rational on a historical perspective? jonathan: if the federal reserve goes higher for longer-term rates, how would the market react to that, kathy? kathy: that is something we talk a lot about. i don't think the general public does. if you start to see the terminal rate move up, i think it would catch a lot of people's attention. 10 year yields tend to peak with fed's rate. if we see the terminal rate move up, you'll see bond rates move up. shifting and year after year instead of dropping it. >> if you look at what potential growth is in the u.s. economy, productivity is what activity

is. jonathan: isn't that it? the long-term potential of this economy is it improving that much. longer-term, what is the story? doug: longer-term you can expect shift. you are at a generational transition. the baby boomers are moving up. we are coming into more of a technology-based economy. sometime you'll reach capacity there. don't look at the dots, i know how for castable they have been -- forecastable they have been. jonathan: we begin with a quick question. does the fed signal for our three? bob: three. jonathan: have a pick for 2018? doug: no. jonathan: have was in the bottom

for credit spreads this year? bob: spreads are going tighter. jonathan: kathy? kathy: yes. jonathan: doug? doug: very close. thank you very much for joining us, bob michele, kathy jones, and doug peebles. from new york, that does it for us. we will see next friday. this is "bloomberg real yield." mom you called?

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close on bloomberg markets. ♪ mark: here are the top stories on the bloomberg. stocks higher in europe and the u.s. traders looking to rate decisions from the fed. better-than-expected factory outlook in the u.s. pushing up 10-year treasury yields. rising tensions with russia. boris johnson says it's likely vladimir putin personally ordered the nerve attack on a former spy on british soil. jpmorgan'sokout decision to buy bear stearns in a fire sale during the financial crisis has paid off big time. ♪ mark: have a look that was