jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ coming up, is a goldilocks growth of fairytale? the beginning of the end for the good times and credit. recent issues show fragility. and looking ahead to chairman pals first news conference -- chairman powell's first news conference. is goldilocks a fairytale is where we start. >> we're seeing it in the labor

force without a big push and wages. at some point, that will end. when that starts to end, i think we will see a reaction in the bond market. >> inflation has an enormous amount of inertia built in on the downside and upside and it will move slowly on the upside. >> the fed will have to pick up the baton and saying we are responsible for leaning against the economy so we don't get an inflation spiral going. going to create complications, especially as the market has to start repricing for more rate increases. >> a little more inflation is not so bad but it is a slippery slope. you can go to two and change to three weekly. >> is the genie out of the bottle? >> not yet, but it is knocking. i'm thinking about coming out, and if i do, know what? -- now what? jonathan: joining me around the michele, bob michael --

kathy jones and douglas peebles. kathy, this doesn't quite compete the picture that everything is ok in the u.s. economy. kathy: first is always a little soft and we had a pretty good fourth quarter in terms of consumer spending, so i think what we are seeing is a normal retrenchment you see, particularly a lot of credit card debt was run of over the past couple of months. there is a tendency to recoup. in general, the economy looks pretty good and that drives it. jonathan: bob, are things maybe not as brilliant as they seem? bob: things are awesome right now. jonathan: welcome me through why. capacity, look at small business optimism. it posted the second highest reading in history. the highest was september, 1983, during the reagan reform years.

look at wage gains, they are starting to pick up. and you look at the central banks. they are being slow and gradual and normalizing at a glacial pace that we in the markets can easily absorbed. jonathan: doug? douglas: i think people are looking at the wrong place at inflation, we don't have much consumer price inflation or core pce. it is an asset prices. -- in asset prices. if you define goldilocks as a buoyant economy, and i think i agree with ball, we not only have a buoyant economy in the u.s. but globally. we have very little treasures on consumer prices, but we do have asset prices that are robust. bob: that is what is so great. the central banks see the asset price inflation also. why are we fighting this? why don't we embrace the ecb? they have moderate growth, moderate inflation, they have asset prices inflation -- asset

prices inflating, why not enjoy the asset prices inflating? douglas: how did that work for japan in the late 1980's and 1990's? bob: they are still figuring it out. douglas: it did not work out. bob: they have optimal yield control and it is spilling through. 10-year: jake peavy traded. -- 70%: between 70 print and 80% of jgb's. kathy: i think it's dangerous. i think in some markets we are close to the bubble popping. but how do you time that? how high do the fed fund rates have to go? i would argue we are not there yet because it is still below the rate of inflation and so easy conditions. bob: i think the fed has a long

way to go. i'm interested to see next week where the summary of economic projections come out. i think the dots will just higher. there behind -- they are behind the curve. they are not interested in normalizing the pace. for us in the markets, that is great. jonathan: you agree to things are great, so what is it in the price? is getmuch the consensus your treasuries, and if you put that against the yield, i'm wondering if the pain trade might develop in the short-term. brewing?rmy weather bob: we should have seen a buy yelp you'd the short position has been built up for a month and a half. we have the central banks continuing to run down their balance sheets, particularly the fed. there is an incremental amount of selling going on. you have a lack of flows coming in overseas because the cross currency basis has shifted.

it's a short base were a big problem, i think we would see rates a lot lower. we have to accept we have not seen rates lower and more selling is to come. douglas: i agree but the ecb is still doing 30 billion euro per month. i think you see that impact on the bund market. every time it wants to react to the data, the weight of 30 billion per month of the ecb ways on it. the italian election is a perfect example. the notion of price insensitive buyers impacting markets has not gone away. bob: but the magnitude has to client appeared january of last year it was 167 billion per month of new money being printed coming into the government bond market. last month, less than 40 billion. there is less of a backstop there. by october, it turns into net contraction. douglas: in october we will have to see what that actually means. bob: it is a bond market that

can support itself. see that do you inflection point in october a something to worry about? kathy: i do. of easy of -- the year money is coming to an end slowly and gradually. as that happens, i am keeping an eye on the dollar. i think the currency market has been ahead of the other markets in this cycle and could signal, if we get a move up in the dollar, he could signal a further tightening of conditions. jonathan: do you see a catalyst for that? kathy: i think based on real yields right now, it should be higher, but we have supply problems in terms of the u.s. market, both in terms of deficits and trade imbalance, we have a lot of political uncertainty going on. i would argue the dollar probably has room to move up from here. jonathan: another flashpoint has been libor. what is going on here?

a lot of people scratching their heads and some have decent explanations. what is yours? bob: there are a couple of things going on, one there is a tremendous amount of issuance of treasury, 300 billion has put away on the market, you also have repatriation of foreign tech andot of the foreign companies have cash overseas, they brought it back and liquidated short-term corporate and put more pressure on the market. on top of that, you have cross currency swap basis shifting. it's not as attractive for foreign investors to invest in the front end of the u.s. market. kathy: i would agree 100%. i don't think it is particular dangerous right now, not signaling that banks are having on ite, but keeping and i and as libor goes up, it drives cost up for a lot of lending in the united states. that is a concern. douglas: total agreement.

i would just caution one thing, times we discount that the price move does not matter at this time, and because we have ways to explain it away, and then you look back times and yoy we should have listened to the libor. jonathan: you can also look at paper and short dated bills in america, there's something on the front and that is high yield, and you wonder, we tried to have this conversation on this program, when does it compete for capital in a significant way? douglas: i think is probably thatating that the notion capital is wanted by the real economy, which is has not wanted for a long time, and financial markets will have to compete with that in that shows up in price or yields. i think it is happening. bob: you look at three-month libor, 2.1%. you take a profit in an asset class, you have a place to put your money into generate of return. you are not at zero anymore. it is creating competition. kathy: i think you are seeing

the equity market, dividend payers are losing ground because people can stick with shorter duration and much less risky asset and get a similar yield to a dividend yield. jonathan: you are sticking with us. coming up, the auction block. campbell soup offering this week, is it offering indigestion? coming up. this is real yields.

♪ i'm jonathan ferro, this is "bloomberg real yield." russia's bond fail is defined is most recent diplomatic spat. sale foreurope on

russia were almost double the $4 billion, the 11 year note narrowing from initial guidance. in the u.s., another round of treasury offerings. one highlight, the average demand for 10 year note fell to the lowest level since 2009. in the u.s. investment great -- but a great market, campbell .oup sold bonds they did not narrow to execution and weekend after they were sold. still with me, bob michele, kathy jones and doug people eebles. -- doug p with campbell soup, a lot of people use it as an example to say maybe it is the beginning of the end of the good times for investment grade credit. what is your view? douglas: i think it goes back to the discussion about the central bank. it is not an on-off switch, but

they are slowing significantly. the liquidity has been available 12 months ago, it is a different level now. lightst expect to see out at any point in time, but markets are behaving today i think more normal than 12 months ago. namely, and then comes up, a ,oncession in the marketplace it prices, it does not trade immediately stronger but we are digesting it and from the day after issuance until now, it is doing reasonably well. been a lot ofas supply to absorb, a huge amount of supply to absorb, and you have the expectation of higher rates down the road. a year ago, i'm not sure everyone believed rates would move up and be higher six months or 12 months from now. now if you are a buyer, you have to give some concession to discount the potential gain. jonathan: it's not dramatic but something you should take some time to look out and pay attention to.

do you see some soft spots in investment grade? bob: i don't come i think the market got addicted to massive flows into the market. ,ne was asian cash coming in when hedge fact even in particular was attractive to the local market. that has dried up as the yield curve has flattened. and a lot of the offshore cash caps on corporate balance sheets. with tax reform, this gets repatriated. the market is trying to adjust to the absent of those two flows, which i think covered up a lot of deals. jonathan: we caught up with scott minor of the time. this is what he thinks she should do with credit. scott: in six income, people should be dramatically upgrading the quality of their portfolios. it is time to get out of high-yield. bank loans typically performed fairly 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, your

thoughts? underweighte not high-yield investment grade, but we have been moving up in credit quality and have been for some time because spreads were so narrow and the premium you got for credit risk with low. i would agree to some extent. the other problem is timing. you don't really know when the cycle turns until it turns abruptly. we think it is time to dial back the risk. bob: i think when you look at bank loans, and this market today, things that we worry about our liquidity -- about are liquidity and crowding, and i can't think of a better example of double the risks than bank loans. you have a lot of people who own that class who don't understand it well. the second thing, the liquidity is not good in that market. you get crowding into liquidity, that is what we would sell. bob: i have been doing this 37

years. i don't remember a time when corporate america has had more financial flexibility. i certainly would not be a seller of credit in here. i think the horizon looks pretty good. when you look at credit spreads, high-yield in particular, you can build a model, there is only one thing to get right. the expectation of default rising. that is highly correlated to an approaching recession. if you don't see an approaching recession, you will not see default rising annual nazi will not see a lot of pressure on the high-yield market. i would like to buy cheaper but i will take it. jonathan: isn't that the point, if it is so good and corporate flacks ability so great, the rough end of the deal is an investor hands? douglas: by and large know. -- bob: by and large, no. it is not a one-time windfall, it is your after year. they do have a lot of flexibility. douglas: i think when you look at the average credit quality of the investment-grade market today, it is pretty low. want to click you

your coupon as long as you can, but also with kathy that it is hard to figure out when to worry about clipping the coupon. when the time comes, i think the amount of oig issuance that falls, the fallen angels so to speak, he will dwarf anything we have seen. jonathan: we can look at the leverage of investment grade, it has been taking up, in the data and numbers. kathy: that is one of the biggest concerns. you have had a huge increase in leverage on corporate balance sheets. when the moment comes, the inflection point, when it is harder to service that debt or you know are got it paid a lot to take the risk. jonathan: the leverage is picking up? douglas: i would argue companies did the right thing when they had ultra, generational funding and return that the shareholders. this is a new year, earnings

estimates are up in the have financial flexibility, tax reform windfall and they will generate earnings to cover the leverage good jonathan: this week, a goes to show investors can be terrible at timing. toys "r" us. is easy to say you can pick your point and look back on things and explain them away perfectly, that no one saw this coming in early september when this debt was trading close to five and then out of nowhere. douglas: please rest -- toys "r" us, people have not been looking at brick-and-mortar -- jonathan: why was into trading near par in september? douglas: i am with bob. jonathan: i think there might still be some skin in the game. get a market check on were bonds have been through the week, twos, tents and 30's. 2-year note higher by two basis

points, down eight on a 30 year. some curve flattening once again in the treasury market. still ahead, the final spread, the week ahead featuring late -- rate decisions from the fed and bank of england. as is "real yield."

♪ i'm jonathan ferro, this is "bloomberg real yield" and it is time for the final spread. it is a big week to come with jay powell first rate decision and news conference since being elected. plus, a decision from the bank of england, a new governor of the bank of china and another potential u.s. government shutdown that not many of you will be paying attention to. still with me, but michael, kathy jones and doug pe ebles. do we assume that the federal

three? grants kathy: you need for dots to move. i think it is doable. assuming that powell is one of them, i think we could see the dots grind up a little. douglas: i think we will certainly see some sort of inching higher in and out, they should be moving higher, but i think the real story is the market is coming up to meet the dots. it has been a long time since we have had that. jonathan: without much encouragement, it has just happened. incredibly enthusiastic in the last 25 minutes, but isn't it most prudent to have optionality as a central banker and leave the upside risk of a for rate hike move further into the year and leave it at three? bob: i think they will leave it at three rate hikes this year. we are interested in the longer-term dots, where is the two and three quarters moving to? back to three or higher? jonathan: is there a catalyst

for it to shift up? bob: i think there is pretty good growth and the labor market looks pretty tight. why not start to get back up to a level that looks more rational on the historical perspective? jonathan: if the fed is starting to guide higher for longer-term rates, how with the market react? i don't think the general public talks a lot about this, but if you start to see the terminal rate move up, i think it would catch a lot of people's attention. teen your -- 10 year yields tend to peak with the fed funds rate, so we see the terminal rate move up, we can expect upon rates to move up as well. jonathan: is there a reason for terminal race to shift higher instead of just dropping? douglas: not necessarily. if you look at what potential growth is in the u.s. economy, it has not changed much and productivity is what productivity is. jonathan: isn't that the point,

the long-term production potential of the economy isn't improving that much? you might get a short-term boost from fiscal stimulus, but longer-term, what is the story? bob: i think longer-term you can expect some shift. you are at a generational transition, the baby boomers are moving out, we are passing that on to millennials. you have to plan for that. we are coming into more of a technology-based economy. at some time you will reach capacity there. when i look at the dots, i don't know how forecastable they have been. it seems they have been coincidental to the rates. jonathan: all of you, let's begin with a quick question with short yes or no answers if possible. does the fed stick with four or three? bob: three. kathy: four. douglas: four. jonathan: have we seen the bottom for credit spreads this

year? have we seen the bottom for credit spreads this year in ig? yes or no? bob: spreads are going tighter. jonathan: they're always going tighter view. kathy: yes. douglas: pretty close to the low. jonathan: great to have you with this, fantastic program, thank you for joining us, bob michele, kathy jones and doug pe ebles. we will see you next friday at 11:30 a.m. new york time. this is "real yield." ♪

♪ >> welcome to "best of bloomberg markets: middle east." investors turn causes as president trump fires his secretary of state. well gets a little bit of a bomb as traders consider the impact it may have on policy towards iran and venezuela. the gulf nation offload its entire stake amid the ongoing isolation by neighboring countries. chasing foreign funds.