♪ jonathan: from new york city, for bloomberg worldwide, i'm jonathan ferro. with 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ coming up, payrolls rebounding in april, the unemployment rate low 4% for the first time since 2000. argentina hiking rates three times in a week and turkeys markets looking fresh out. and elon musk lashing out on a conference call, teslas debt rolling over. we begin with the payrolls report. unemployment -- on

employment is strong. to 3.9 is down astonishing because it means we have the longest labor expansion continuously. >> the bad news on this is solid gains in employment that have pushed the unemployment lower, means we are stuck at a low growth, low inflation world. >> it is easier to get a number like this in the 100s, low wage growth as opposed to a 350,000 today, an upside surprise. >> it has gotten stuck here. we expected to accelerate going forward because the unemployment rate isn't going to stop here. it will continue to drop, but it is a mystery why we haven't had more wage inflation. >> i would say we aren't capturing the underlying trends in wages. wages are moving up in the u.s.. >> in 2018, you are going to have the biggest increase in real wages we have had in a dozen years or so. jonathan: joining mimi -- joining the in new york are our

guests. great to have you with us. the threen with handle on unemployment. there are no inflationary consequences seemingly in wage growth. why not? keeping wagety is inflation low. we have been seeing good payroll numbers, but until you see real -- thecomes growing question for the fed is, do they need to accelerate here? to got think they need three times necessarily because there is no inflation pressure. let's see the economy heat up a little. do they really need to go three times more? let inflation pick up before they try to get to neutral. jonathan: looking at the statement from the federal reserve, it doesn't sound like it is in a hurry. that statement is one thing and that is symmetrical.

two mentions of one word, the clearest evidence in fomc statements that said it is happy ofh the continued course inflation, willing to let it move above the 2% target and continue on their merry way toward however many more hikes may be this year. jonathan: do we have to say we don't really know what is going on in the labor market in the united states? can be interpreted as, we don't know what is going on and making it up as we go along as the phillips curve's get adjusted. one thing i was struck by him this morning's report was the the 2006umber took out low, but pce is almost 100 basis points lower today than back then. something has changed. >> there are only two actions bear, lower unemployment works or there is no linear

relationship to begin with between low unemployment and price levels. michael: if you go back to after the great financial crisis, this , buttionary credit event on top of that, you had an escalation of globalization technology and all the structural forces seem to have taken a step higher there at the same time. in 2011, it was masked by that, but that is what the fed is grappling with. thethan: if you think about trading regime, we were talking about a goldilocks regime and spent most of 28 team talking about whether or not we break into a new regime. low output growth and inflation. are we still there? >> as long as the fed doesn't try to go above normal. when the fed tries to go above neutral, which the sep suggested early 2020, they take the funds .ate 3% higher

that is away from the normalization regime into tightening. that is when i wonder, how do risk assets and credit react? then you change into this unwind regime. michael: we are a lot closer to neutral then 2020. if you look at the original estimates, he added a gauge of where nuclear -- policy should be. within firing distance of the next three quarters. >> think about people who want to be on the front-end. we still have a negative real yield at the front-end of the treasury curve. the fed will get to a place where they are less accommodative and we start to see real rate increases over the federal reserve. how does the front and shape up and how much oxygen is left in the trade to carry on in the short end? priya: the fed is already pricing in two more hikes next

year. we have already gotten four hikes priced in. it seems pretty appropriate in my mind. front-end is grappling with supply because the treasury this week, a lot of the surprise -- supply will be in the zero to 5% of the curve. i would say if you can buy a two-year note at 250, you might as well buy that. you are taking a lot of duration risk for a not -- not a lot more yield. that will bring demand. jonathan: it is a conversation we keep having on "bloomberg real yield" whether you should take duration risk at 250 basis points, even less to go from tens to 30's. >> absolutely, 50 basis points for another eight years -- not a great trade. dynamicse other happening on the long end of the curve is what is happening overseas and it seems like this

ecb pivot to a more hawkish stance got more push back this week. our hikingexport cycle a little to the bond market in their two-year yields, but we are importing a bit of their balance sheet and negative interest rates on the long end. i think that is going to keep in tactfully while, where you aren't going to get great value there. the two's are going to be looking more attractive than the tens. jonathan: we blame in eastern. i can tell you where least be next year and the year after. economists should be able to get their estimates in line with where we were. it is a downside surprise and i think the ecb has to be in king, we are way off our target. it certainly seems so. the more optimistic's playbook

we are looking at is a late 2019 rate hike. that is a lot of data between them and we don't have a good model for predicting monthly inflation prints. but, hard to say at this point in the growth cycle with confidence that there will be a rate hike anywhere on the horizon. jonathan: that matter, can treasuries go it alone? about supply,g rate hikes, but the spread between treasuries and bunds is getting higher. priya: in the long end, it is disconnected from heights -- hikes. the market has looked at the weaker european data and pushed back the end of qe. the ecb is going to an qe this year. early next year, there is a scarcity of bunds, they realize they can't do qe forever, so they might end qe. then you she an upward movement in bunds. i think the treasury-bund

spread should compress. michael: if it does, it it is probably because their euro is rising. the piece of the puzzle that is absent from a look at relative spreads between the usd and the euro curves, swap spreads have been deeply negative, which makes it hugely expensive for euro or japanese investors to hedge out currency risks buying u.s. treasuries. it looks like a 2% or 3% nominal yield, so a japanese investor looks worse than local currency yields. jonathan: when does it get more attractive for foreign investors? guy: december or so, there is a sot of market plumbing asset that no one can put up or understand. everybody is sticking with me. priya misra, td securities, .ichael purves, guy lebas coming up, the auction block.

mnuchin has a record-setting first quarter for borrowing. more on that later. yousef: -- this is bloomberg real yield. ♪

♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." block, ao the auction record first-quarter issuance from the treasury. the treasury borrowing $488 billion, the single biggest quarterly amount of debt sold since 2008. the treasury said it will boost the amount of long-term debt to $73 billion in the current quarter. in u.s. corporate's, may could

be strong for issuance. it has been the largest month the last three years with an average of $171 billion and in south america, the nerves surrounding rates have spread to the bond market. four companies postponing $2 billion of planned u.s. dollar bond sales this week. with me in new york is michael purves, guy lebas, and priya misra, td securities. and youre in argentina are throwing rates up to 40%, some would argue you are guessing now. what do you need to do to get this done? argentina is a specific case when it comes to e.m. and it almost brings us back to the brady bond days. think there has been a stronger dollar high rate in the u.s.. the argentina story is specific

to argentina. jonathan: there is an idiosyncratic reason, where there is some string that aligns these two things, it is central bank credibility. there almost is none. you see that in turkey and in argentina. is that the similarity? has a prettyey loose monetary situation and fiscal condition that isn't construct of. -- constructive. both of those things -- you are going to get a little old-fashioned e.m. central bank and fiscal credibility issues converging at the same time. >> more broadly, the story for e.m. the last year and half has been to get longer yen and pay -- play the currency risk because the dollar will get weaker. the dollar move has made people more uncomfortable than they were relative to a month ago. is there a reason to be

uncomfortable in e.m. longs? priya: the dollar is in structural decline mode. hase is a diversion that come back. u.s. data has been ok. hasrest of the world decelerated and everyone came into the year short dollar. adjust, why the markets but very soon, the dollar will go back to its secular decline, so e.m. should be ok barring the idiosyncratic issues. consistent the most features of the late cycle pre-recessionary u.s. economy is a face ripping rally in the dollar that catches everyone by surprise. i am not saying that what we have seen in the last two weeks is a start of that, but that would be one more example of cycle activity and that combination of liquidity

pullback and a rally in the dollar would be pretty awful for the yen. people worrying across assets with the exception of maybe credit about late cycle things. there seems to be a lot of it among equities, but not in credit. why are we seeing a lot of investors gripped by late cycle fear? michael: if you look at the vix high-yield credit spread ratio, what happened in the history of the high yield complex, it made a record low. the vix moved up a lot and credit spreads did not. it is obvious some of that was specific to the vix etf's blowing up. that ratio has re-paste a bit, but is still quite low. when you look at i.t. credit spreads and you look at high-yield credit spreads and the violence we are seeing in the s&p 500, what is being shown

is we are not that late cycle in the u.s. economic trajectory, but there is a whole lot of regime changed with tech stocks keeping the vix elevated. i am looking at credit spreads as a better read on the economy than s&p and vix price action right now. i don't necessarily see a lot of late cycle indicators. i'm not saying -- i'm saying more the seventh inning as opposed to the ninth inning. jonathan: it gives us time to late -- worry about late cycle fears? guy: not necessarily because the wheels will fall off the bus, but the issue we have for the clients on the 12 month horizon, you are not getting paid to take the risk. my recommendation is don't be a hero. it isn't benefiting you and we are certain to get better

valuations in 12 months. if i am wrong on the credit side, rates should be higher. tesla comesst year, to market and for this maturity at this credit rating, a coupon of 5.3% was a record low yield. very tesla specific reasons, that yield is about 7.5%. a real repricing. was august the abnormal time for the high-yield market and are we getting a little bit more normal relative to last year? guy: i am not in a position to talk about credit specific to tesla, but that company attracts a certain fanatic investor. i wouldn't be surprised if a fair amount of that debt found its way into rehab -- retail hands on average. i'll put it in terms that elon musk might. jonathan: in terms viewers might like, this credit market still high -- wide open for companies like tesla in the way it was last year?

guy: a little less so, but more wide-open. the less can -- lesser concern is the -- over the course of the last few years and i hear the same advertising points over and over again. hey, we had low default rates during the financial crisis, 95% recoveries on what did refund -- default. this sector is in no position to be able to handle the next crisis, so that is the sector of biggest concern within the credit markets to me. jonathan: great to have you with us. guy lebas from montgomery, michael purves from weeden and company, priya misra from td securities. treasuries, twos, tens, and 30's through the week. yields up on the front-end by a single basis point to 250 on a u.s. 10 year and unchanged at the longer and. still ahead, the final spread. the week ahead featuring the

bank of england and mark carney. that conversation is next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." time for the final spread. next week, nafta talks resuming in washington, d.c., bank of england out with a policy decision and inflation report, plus a news conference from governor mark carney. we get u.s. ppi data and await a decision from president trump in regard to the iranian nuclear deal. still with me, michael purves from weeden and company, priya misra from td securities, and guy lebas from montgomery. a big week for issuance coming up. a failed you define auction and will we get one in the treasury market? it wasn't until later this week when blackrock brought the

subject up to me. how would you define it and are we due one? priya: we have primary dealers, the idea for a failed auction doesn't exist. the way i would define a failed auction would be if the deal is significant. when the wi market trades at a certain rate, the actual auction comes in 5, 7 basis points higher. that would be a big shock to the treasury market. thoseen't seen any sign options are having any trouble but that is because the rest of the world is buying our debt happily. what worries me longer-term is if we are going into a trade war world, you have countries who say, why do we hold all these -- our reserve in dollars? thatcan result in a failed moves rates hires. guy: that is a fair assessment.

what matters in the end is customer buying of treasuries and levels will adjust to that. primary dealer system is set up well in that regard. aat is an amusing from long-term perspective is three years ago, we were worried about a shortage of safe haven assets in this world and now we are drowning in them as a perception. in both cases, somewhere in between, there will be good manned for the treasury curve. jonathan: there are people worried about a shortage of safe haven assets were the ones that said the u.s. government should widen the fiscal position and take advantage of low rates and they are the people complaining about them now. michael, do you see a market well set up to absorb record issuance from the united states? michael: most probably. the thing i think is interesting is the term premium on ten-year treasuries exploded with the fiscal -- the tax plan in december and then it came right

back and if you look at the move trading take been for ticket with that term premium. rates have been going up, nominal rate has been going into a higher range, but not in the way we expected when we took 2.64% in february. if the term premium can stay low, i will guess there is going to be stability in the 10-year and that will help people buy and you have your friends in the ecb and japan, creating a base backdrop for that. will wrap up the program with a rapidfire question round. i will put you in the boxes and go through the questions individual. symbol of maturity, british or argent -- turkey or argentina debt through year-end? michael: i'm going to guess argentina. currencyey, 15%

through the end of the year is appealing. priya: i will go with turkey. jonathan: a credit question, tesla or we work? three-year end? michael: tesla has a stronger religious base. wework. would go with guy: horde your cash. jonathan: final question, is the next move at the bank of england rate hike or rate cut? michael: hike. priya: hike. guy: hike, currency volatility means more inflation. jonathan: it has been great to have you with me. michael purves from weeden and company, guest: priya misra from td securities, guy lebas from montgomery. this is "bloomberg real yield." ♪ mr. elliot, what's your wifi password?

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near or far covered. leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. ♪ jonathan: i'm scarlet fu, this is bloomberg's etf iq, where we focus on the risks and rewards offered by etf's. -- exchange traded funds. ♪ priya: it is a bond bonanza, debt etf's have more than doubled assets's 2013. we dive into the rapid growth. the milken institute draws a crowd of investors. the debate over possible dangers surrounding etf's a hot topic at the summit. we drill