jonathan: i am jonathan ferro. this is "bloomberg real yield." payroll rebounding in april. 4%.ployment rate below trouble in paradise. argentina hiking rates three times. elon musk lashing out on a conference call, tesla's debt rolling over. we begin with the payroll 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 astonishing. would it means is we now have the longest labor expansion continuously. >> the bad news for me on this is that solid gains of employment that continued to push the unemployment rate bloomberg means we are stuck in a 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 going to continue to drop. it is a bit of a mystery as to why we have not had more wage inflation. >> 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 in years. >> joining me is 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. there are no inflationary consequences, seemingly, in terms of wage growth. why not? >> productivity is keeping wage inflation low. until you see wage inflation, incomes are not growing. does the fed need to accelerate? there is no inflation pressure. let the economy heat up a bit. to the feds really need to go to more times? let inflation really pick up before they try and get to neutral. >> the statement from the federal reserve did not sound like a fed that was in a hurry. >> two mentions of one word, the clearest evidence i have seen since the greenspan era. they're willing to move above that 2% target and continue on their merry way towards however many more hikes this year. two, possibly three.

>> do we have to say we don't really know what's going on in the labor market in the united states? >> it could be interpreted as, we don't really know what is going on. 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 lower today than it was back then. >> something has changed. >> there's only two bank options. lower unemployment, or there is no linear relationship to begin with between lower unemployment and price levels. >> after the financial crisis, you have this event, but on top of that you have the escalation of technology and all the structural forces seem to have taken a step higher at the same time.

i think 2009, 2010, 2011 was kind of masked by that. i think that is what the fed is grappling with. >> you think about the way it has been shake, 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. 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 fund rate to 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 think we are closer to neutral than 2019 or 2020. if you look at the original estimates, a gauge of where neutral policy should be, 2.25-ish. inflation plus a small margin, right? that is within firing distance in the next three quarters. >> think about people who want to buy the front end. we still have a negative real yield on the front end of the treasury curve, so the fed will get to a place where they are less accommodating and we start to see real rate increases over the federal reserve. how much oxygen is left in the trade? >> i think the front end is already pricing in two hikes next year.

hi -- hikesest this 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 weekend set a lot of the supply is in the zero to five-year part of the curve. that has to be priced in. if you can buy, you might as well buy. you are taking a lot of risk for not a lot more yield. >> it is a conversation we keep having. whether you should take duration risk for a pickup of 50 basis points to go out to 10, or 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 kept it to a more hawkish stance got pushed back this week. we tend to export our hiking cycle a bit to the boom market. 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 condition intact for a while. you will not get great value. the twos are going to be more attractive than the 10. >> i love the commentary around soft inflation. i can tell you where easter will be the next year and the year after that. economists should be able to get estimates in line. surely the ecb has to think, we are way off our targets. >> it seems so. the more optimistic playbook, a late 2019 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.

as that easter whoops! kind of shows. but, hard to say at this point that there will be a rate hike anywhere on the horizon. >> 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 burdens. it is getting even higher. >> i think in the long end, 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. then you should see upward in bonds. treasury bonds 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. the 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 risk buying u.s. treasury's. it looks like a 2% or 3% nominal yield actually looks worse than local currency yields. >> when does it start to look 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 that no one can predict or understand. >> everybody is sticking with me. coming up, the auction block. steve mnuchin and the u.s. treasury have a record-setting first quarter for borrowing. this is bloomberg real yield. ♪

♪ jonathan: 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.

the treasury said this week that it will boost the amount of long-term debt to $73 billion this quarter. may could be a strong month. 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 and rates has spread to that bond market. with me is michael purvis. mr. purvis, if you are throwing rates up to 40%, some 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 3% the cost of debt. there has been a strong dollar higher rate story in the u.s. i think the argentina story is specific to argentina. jonathan: there are some idiosyncratic reasons as to why argentina is being slapped around. there is some string that aligns these two things, central-bank credibility. there almost is none among investors about 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 have a little old-fashioned em central bank and fiscal

credibility issues converging. jonathan: more broadly for e.m., 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. it is a reason to be uncomfortable. >> our view is that the dollar is declining more. u.s. data has been ok. the rest of the world has decelerated and everybody came in to the short dollar. we think very soon the dollar will go back to its decline. e.m. should be ok. >> 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 it would be one more example of these indicators in the u.s. signaling late cycle economic activity, and that combination is pretty awful for the e.m. >> people are worrying about late cycle themes. this seems to be a lot in equities. 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. it moved up a lot and credit spreads did not. some of that was specific to the vix etf blowing up. that ratio is still quite low. when you look at i.g. credit spreads and high-yield credit spreads, think about the violence we are seeing in the s&p 500, what is being shown is that we are not that late cycle. there is a bunch of regime change with tech stocks which is keeping that vix elevated. i am looking at credit spreads as a better read on the economy than s&p and the vix pricing. 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. 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 particularly for clients we are supporting on a 12 months -- 12 month horizon, you are not getting paid to take the risk. my 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 an issue at the end of august. 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 re-pricing. was august the abnormal time for the high-yield market, and are getting more normal relative to last year?

>> i am not in a position to comment on credit specific to tesla, but that company attracts a certain fanatic type of investor. i would not be surprised if that debt found its way into retail. 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 market still wide open for high cash burn companies like tesla? >> a little less so, but still pretty open. the area of most concern is of leverage loan space. they've grown significantly over the course of the last few years, and i hear the same points over and over again. hey, we had low default rates during the global financial crisis, 90% recoveries on what did default. this debt sector 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 to me right now. jonathan: great to have you with us. i want to get you a check on the

markets. yields up 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. this is bloomberg real yield. ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time for the final spread. coming up, nafta talks resuming in washington. the bank of england out with policy decision and an inflation report. plus, a news conference with governor mark carney. we get u.s. data and 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 blackrock brought the subject up. how would you define a failed

auction and are we due one in the united states? >> the one good thing with u.s. treasury markets, we've got primary dealers. the idea of a failed auction does not exist because every primary dealer has to put it in there. when the initial market trades at a certain rate, the auction comes in five or seven basis points higher. that would be a 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 very happily. 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 we see 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 adjust to that.

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. 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. the same people are complaining about that now. michael, do you see a market that is set up to absorb record issuance 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 tax plan in december. then it came right back. if you look at the move index, it has been trading tick for tick 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. and you have friends in japan creating a backdrop for that. >> i'm going to wrap up with final questions. a rapidfire question round. go for the questions individually. similar maturity, turkish or argentina debt through year end? michael. >> that's a tough one. i'm going to guess argentina. >> turkey.

> turkey. 15% is appealing to me. >> i'm going to go with turkey as well. jonathan: tesla or wework? three-year end? michael. >> tesla has a stronger religious base here i think, so i'll have tto go with that. >> i will go with wework. the world is moving toward that 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. ♪ mr. elliot, what's your wifi password?

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