jonathan: from new york city for our viewers worldwide i am , jonathan ferro. for 30 minutes dedicated to fixed income, this is "bloomberg real yield." up payroll rebounding in , april. the unemployment rate below 4% for the first time since 2000. trouble in paradise. argentina hiking rates three times in just a week, and turkish markets looking fragile. elon musk lashing out on a conference call, tesla's debt rolling over. we begin with a big issue, the payrolls report. >> 3.9% unemployment rate is strong. >> this is a great number for the markets.

>> this is good news. >> getting down to 3.9 is really astonishing because it means we have the longest labor expansion continuously. >> the bad news for me on this is that solid gains of employment that continue to push the unemployment rate bloomberg means we are stuck in a low growth, low inflation world. >> it is much easier that we get a number like this as opposed to if we had 350,000 today or something. >> it has kind of gotten stuck. we expect to continue to accelerate going forward because the unemployment rate is not going to stop here. it is going to continue to drop. it is a bit of a mystery as to why we have not had more wage inflation. >> on the wage front i would say , we are not capturing the underlying trends in wages. wages are moving up in the u.s. my guess is in 2018 you will have the biggest increase in real wages we have had in a dozen years or so. jonathan: joining me is michael

purves, the chief global strategist for wheaton and company, the head of global strategy at td security, and the chief income strategist at jd montgomery. great to have you with me. free handle on unemployment, yet there are no inflationary consequences, seemingly, in terms of wage growth. why not? >> productivity is keeping wage inflation low. we have been seeing very good payroll numbers, but until you see wage inflation, real wage incomes are not growing. does the fed need to accelerate? they can hike two times. i do not think they need to go three times necessarily, because there is no inflation pressure. let the economy heat up a bit. to the fed, do they really need to go two more times? let inflation really pick up before we tried to get to neutral. jonathan: the statement from the federal reserve did not sound like a fed that was in a hurry. >> that statement was one thing, and that is "symmetrical."

two mentions of one word, the clearest evidence i have seen that the greenspan era said they are happy with the course of inflation, they are willing to move above that 2% target and continue on their merry way towards however many more hikes this year. jonathan: do we have to say we don't really know what's going on in the labor market in the united states? >> the fed's data dependency could be interpreted as we don't , really know what is going on. we are making it up as we go along, as the fellows curve get adjusted. i think one of the things i was really struck by by this morning's report was the u6 number took out the 2006 low, but pce is almost 100 basis points lower today than it was back then. jonathan: >> something has changed. >> there is only two options. lower unemployment, or there is no linear relationship to begin with between lower unemployment and price levels. jonathan: >> michael?

you go back to what is happened after the financial crisis, you have this great deflationary event but on top of that you have an excavation of globalization technology and all the structural forces seem to have taken a step higher at the same time. 2010, 2011, was kind of masked by that. i think that is what the fed is grappling with. jonathan: you think about the way it has been shaped we were , talking about a goldilocks regime. we spent most of 2018 talking about whether we would break into a new regime. goldilocks being high output growth, low inflation? are we still there? >> i think we are. as long as the fed does not take the rate to neutral i think we , will still be in this goldilocks. the risk in my mind is when the fed tries to go above neutral, which may happen late 2019 or early 2020. they plan to take the funds rate

3% higher. that is away from eight normalization regime into tightening. that is why wonder how risk assets and credit react. i think they need change into this unwind regime. >> i suspect we are closer to neutral than 2019 or 2020. if you look at the original estimates, a gauge of where neutral policy should be, you 2.25-ish. margin,n plus a small that is within firing distance in the next three quarters. jonathan: think about people who want to buy the front end. we still have a negative real yield at the front end of the treasury curve, so 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 end shape up and how much oxygen is left in the trade? >> i think the front end is already pricing in two hikes

this year, two hikes next year. we have already gotten four hikes priced in. seems pretty appropriate. i think the front end is grappling with supply. the treasury came out this week and said a lot of the supply is in the zero to five-year part of the curve. that has to be priced in. after that, i would say if you can buy, you might as well buy. you are taking a lot of duration risk for not a whole lot more yield. that will ultimately bring demand. jonathan: it is a conversation we keep having whether you , should take duration risk for a pickup of 50 basis points to go out to tens, or even less to go from 10 to 30. there is not much incentive there. >> absolutely. 50 basis points for another eight years sounds like not a great trade. one of the other dynamics happening on the long end of the curve is what is happening overseas. it seems like this ecb have it

to a more hawkish stance got pushed back this week. we tend to export our hiking market.bit to the bund you can see it in two-year yields. but we are importing a bit of their balance sheet and negative interest rate on the long end. that will keep this conundrum this condition intact for a , while where you will not get great value. the twos are going to be more 's.ractive than the 10 jonathan: i love the commentary around inflation. i can tell you where easter will the next year and the year after that. economists should be able to get estimates in line. it is a downside surprise, and surely the ecb has to think, we are way off our target if we think about hiking our rates anytime soon. >> it seems so. the more optimistic playbook, a

2019 or late 2018 rate hike. there is a lot of data between here and there on inflation. goodness knows we do not have a good model of predicting monthly inflation. but, hard to say at this point with any confidence that there will be a rate hike anywhere on the horizon. jonathan: for that matter, can treasuries go it alone? we keep talking about this march hike because of supply, because of rate hikes, but that is spread between treasuries and bunds is getting even higher. >> it is disconnected from hikes. it is about qe, and the market has looked at weaker european data and pushed back the end of qe. in my mind, the ecb will end qe this year. they realize they probably can't keep doing qe forever, so they might push back the hike but end qe. you should see an upward movement in bunds.

treasury bunds spread should start compressing. >> if it compresses, it is because the yield curve is rising, not because ours is declining. the piece of the puzzle that is absent from a look at relative spreads between the u.s. dollar and euro curves is that cross currency swap spreads have been deeply negative, which makes it expensive for euro or japanese investors to hedge out currency u.s. treasuries. it looks like a 2% or 3% nominal yield actually looks worse than local currency yields. jonathan: when does it start to get more attractive for the foreign investor? >> cross currency swaps have been negative since december or so, since the passage of the u.s. tax law. there is a lot of market plumbing aspects going in there that no one can predict or understand. >> everybody sticking with me. coming up on the program the , auction block. steve mnuchin and the u.s. treasury have a record-setting first quarter for borrowing.

a little bit more on that a little bit later. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block. a record quarter for first quarter issuance from the treasury. the treasury borrowing $488 billion, the biggest quarterly amount of debt sold since 2008. in addition the treasury said , this week that it will boost the amount of long-term debt it sells to $73 billion this quarter.

may could be a strong month for issuance as well. it has been the largest month over the last three years with an average of $171 billion. down in south america, the nerve surrounding high u.s. rates has spread to that bond market. postponing at least $2 billion of planned u.s. bond sales this week. mr. purvis, if you are throwing -- if you are argentina and you are throwing rates up to 40%, some people might argue -- what do you need to do to get this done? >> argentina is a specific case. in this whole em discussion, there is a lot of specifics. it brings back the days when the cost of equity was cheaper than the cost of debt. there has been a strong dollar higher rate story in the u.s. i think the argentina story is very specific to argentina. jonathan: there are some idiosyncratic reasons as to why

argentina is getting absolutely slapped around, and turkey is as well. there is some string that aligns these two things, central-bank credibility. there almost is none among investors for their ability to contain inflation. is that the similarity? >> turkey has a loose monetary situation and a fiscal condition that is not constructive. both of those things, you will get a little bit of old-fashioned em central bank and em fiscal credibility issues converging. jonathan: more broadly for em the story of the last year has , been to get local currency, why not, the dollar will keep getting weaker. the dollar move over the last couple of weeks has made people a lot more uncomfortable than they were relative to a month ago.

is there reason to be uncomfortable in these em longs? >> our view is that the dollar is in a structure and decline mode. u.s. data has been relatively ok. the rest of the world has decelerated, and everyone came into the year short dollar. we think very soon the dollar will go back to its decline. barring the ok, issues with argentina and turkey. >> one of the most consistent features of late cycle pre-recessionary u.s. economy is a face ripping rally the u.s. dollar that catches everyone by surprise. i am not saying that what we have seen over the last two weeks is the start of that, but that would be one more example of these indicators in the u.s. signaling late cycle economic activity, and that combination , both weakness and liquidity pullback in the u.s. and a

pastry of an rally for the dollar, is pretty awful for the em. people are worrying cross asset about late cycle themes. this seems to be a lot in equities. economists are a lot more so as well, but not in credit. why are we seeing investors gripped by late cycle fears? >> if you look at the vix to high yield credit spread ratio, what happened in february was a record low. in other words, the vix moved up a lot and credit spreads did not. some of that was specific to the vix etf blowing up. that ratio has retraced a bit, but it is still a little bit low. when you look at i.t. credit spreads and high-yield credit spreads, think about the violence we are seeing day today in the s&p 500, what is being shown is that we are not that late cycle.

-- in the u.s. economic trajectory. there is a bunch of regime stocks withinch the s&p that is keeping that 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 we are in the fifth inning, but maybe more the seventh-inning as opposed to the ninth. >> which gives us a year, year-and-a-half. jonathan: that gives us time to worry about late cycle fears as a credit investor. >> on the margin, yes, and not necessarily because the wheels will fall off the bus -- choose your metaphor -- but the issue that we have particularly for clients we are , supporting on a 12 month horizon, you are not getting paid to take the risk. my universal recommendation is do not be a hero. it is not benefiting you. we are certain to get better valuations 12 months down the road. if i am wrong on the credit side, rates should be higher

anyway. jonathan: last year, there was a big issue at the end of august. tesla comes to market, and for this maturity at this credit rating, this was a record low yield. for very tesla-specific reasons, that implied yield, as i see things on my bloomberg, is about 7.5%. a real repricing. was august the abnormal time for the high-yield market, and are we getting more normal relative to last year? >> i am not in a position to comment on credit specific to tesla, but let me say, that company attracts a certain fanatic type of investor. i would not be surprised if that debt found its way into retail hands. i will put in terms that elon musk might, that is boring. let's move on to the next question. jonathan: i would put it in terms that some of our viewers might like. is this credit market still wide open for high cash burn companies like tesla the way it was last year?

>> a little less so, but still pretty wide open. the area of most concern is the leverage loan space. they've grown significantly 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 global financial crisis, 95% recoveries on what did default. this debt or specific subsector is issuing to the last crisis, which means it is in no position to handle the next one, so that is the sector of biggest concern within the credit markets to me right now. jonathan: great to have you with us. i want to get you a check on the markets. yields up on the front end by a single basis point to 250 on a , u.s. 10 year and unchanged on the longer end. still ahead, the final spread, the week ahead, featuring the

bank of england and governor mark carney. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. coming up over the next week nafta talks resuming in , washington, d.c. the bank of england out with its policy decision and an inflation report. plus, a news conference with governor mark carney. we get the u.s. cpi data and we await a decision from president trump in regards to the iranian nuclear deal. big week for issuance coming up. how would you define a failed auction, and are we going to get one anytime soon in the treasury market? the reason i ask is not because i'm thinking about it. i was not until this week when rick reader of blackrock brought

the subject up. how would you define it? >> the one good thing with u.s. treasury markets, we've got primary dealers. the idea of a failed auction actually does not exist because every primary dealer has to put bids in there. i would define a failed auction is when the deal is significant, so when the initial market trades at a certain rate the , auction comes in five or seven basis points higher. that would be a pretty big shock to the treasury market. we have not seen any signs so far that these auctions are having trouble, but that is because the rest of the world is buying our debt. what worries me is if we are going into this trade war, does the dollar lose its reserve status? we have countries who say, why do we hold reserves in dollars? do you see any reduction in foreign demand? i think that can result in a big tail which can move rates higher. >> i think it is a fair assessment. what matters is the end customer buying of treasuries, and levels

will ultimately adjust to that, even if there is in one given auction, not enough customer demand. primary dealers will set up well in that regard. what is amusing from a longer-term perspective is two or three years ago we were worried about a shortage of safe haven assets in this world, and now we are basically drowning in them, is the perception. in both cases, somewhere in between. there will be demand for the treasury curve, just maybe five basis points higher? jonathan: you worry about people worrying about a shortage, maybe the same people saying we should loosen the purse strings and take advantage of low rates. they are the same people are complaining about that now. michael, do you see a market that is pretty well set up to absorb some record issuance once again from the united states? >> most probably -- the thing i think is interesting is the term premium on 10 year treasuries, how they exploded with the fiscal the tax plan in december. , then it came right back.

if you look at the move index, which is sort of a vix for the treasury, it has been trading ick with the term premium. it has been going into a higher range, but we have not seen what we expected when we took 4% and all that back in february. if the term premium can stay low, i guess there will be stability in the 10 year and that's going to help people buy. of course, you have your friends across the ocean in the ecb and japan creating a backdrop for that. thethan: i am going to take opportunity to wrap up the program with some final questions a rapidfire question , round. go for the questions individually. similar maturity, turkish or argentina debt through year end? turkey or argentina? michael? >> that's a tough one. i'm going to guess argentina. >> turkey. 50% -- 15% carry on the

currency. >> i'm going to go with turkey as well. jonathan: tesla or wework? a similar maturity through year and? >> tesla has a stronger religious space, so i will go with that. >> i will go with wework. the world is moving toward that type sharing culture. >> just hold your cash. jonathan: is the next move of the bank of england rate hike or rate cut? >> hike. >> hike. >> hike. the currency of volatility means more inflation. jonathan: it has been great to have you with me. this was "bloomberg real yield." this is bloomberg tv. ♪ mom, dad, can we talk?

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