>> from new york city, i am jonathan ferro. 30 minutes dedicated to fixed income. this is "bloomberg real yield." coming up, a jobs report leaving the federal reserve on track to deliver more hikes this year. political risk in italy. what is needed most. and a tough week for a former bond king. us why his firm had the biggest order drop in a year. we begin with the jobs report. >> the numbers are strong. >> it is a good, solid gain in the labor market.

>> the wage number was important and this is good on the way to run as well. wages are just about 2.5%, it is still not strong. inflation is bouncing around so real wage growth is pretty muted. people are dipping into their savings to spend, and that is worrisome. not 3% sustained, still not seeing that real acceleration, broad-based acceleration in weight growth that we want to see out there. >> pretty much a scenario where the fat hawks basically think they can move forward once, twice, some say three times. i say june is the last. >> the numbers are strong now. next year it will be different. if you think about whether the fed will go three or four times total, probably four times. how much they go next year is a question. robertn: joining me is tipp, mary bowers of hsbc global

asset management, and bob miller. to have you with me. bob, i want to begin with you. very hard to find any weakness in the jobs report today. any? i am sure if you look hard enough, you could find something but it is a solid report. labor market in a great place. in our judgment, will continue to grow, albeit not at the pace as the last few years. on implement headed toward 3.5, maybe a touch below. in a week that people are trying to poke holes in the macro back drop trade, things in europe happening, things in the u.s. seem to look pretty decent. >> for high yield, you would not think of it as being a safe haven, but u.s. high yield relative to other regions has held well. what has been a problem for high-yield? rates. when we get a number like today,

it keeps us cautious on the duration side, keeps us still liking the ccc and b part of the market. jonathan: some people were .ooking at rate hikes o does that still make sense? crisis,you had that when the chinese currency was on the brink of the valuation, the fed moved to the sidelines. we saw that earlier in january when there was stress in the markets, volatility spikes. that is correct of the market to figure the fed may get dragged into this. italy is a big country, the european project is basically 20 years old, celebrating their 20th anniversary at the ecb. it could be a systemic shop, so that makes sense. as yousaid that, as soon get past the peak of the crisis and go back to pricing in the

realities of fundamentals on the ground, they are good. jonathan: so why do we have this spread that is so big? we have the dot plots against the markets. more recently, things they're, and now they have blown out again. know 2020 is ages away, but this gives you an indication that this market does not quite believe the federal reserve can go where it is projecting to go. blackrock in between those lines? you appropriately showed the clip earlier from my colleague. rick weir said that we think the fed will move 3, 4 times this year. we don't think they are going much -- at least for the time being -- much about 2.5. the markets are priced for 2.5. the gap in the dots -- i know you know this -- the markets are a probability-weighted pricing mechanism.

it includes some probability of higher rates, some probability of lower rates. the long-term neutral rate in this country is under debate. there is a fiscal policy impulse that is just now kicking in, likely to impact growth and inflation for the next several quarters. in the overall medium-term with a demographic trends, technological innovation impacting inflation, we don't think rates are going as high as the dot plot suggests. jonathan: do you agree, robert? >> i see them going higher. the economy is good and it will continue. i agree that once they get to what they perceive as neutral, the burden of proof will really rise for continuing to raise rates. ,onsidering we are in a world people in the u.s. thinking, these are not high interest rates, but you look around the world and rates are really low. after being as high

as 65 basis points, 20 of a few days ago. we are in a really low interest rate world. i think we will probably get some signals of that will slow them down, once you get to that 2.5 area. jonathan: and negative all the way out six years on the bund curve. this concept of the federal reserve gradually moving through neutral. reserve tohe federal get to a place where it can move to neutral, what does that mean for risk assets in the u.s., where for a long time we have had very accommodative policy? >> it is interesting, and as we have seen the fed move or high-yield, this year we have seen a good amount of outflows from the asset class. all that being said, spreads have been fairly stable. certainly, as rates rise, some of the more levered issuers in our market could see some headwinds in terms of the cost of debt. jonathan: i saw a piece from a

professor at the university of oregon on twitter. it talked about the tension in the market. the federal reserve is talking about moving through neutral. the market does not buy it because they see the federal reserve never said about inverting the yield curve. can you reconcile those two things? can the federal reserve get away with getting through neutral without inverting the yield curve? >> it's possible. one of the important factors that will influence the outcome is out of the fed's control, treasury issuance. manages the treasury the growing deficit financing needs they have over the next several years? so far they have not extended the duration of the weighted average maturity and are unlikely to do so in the near term. a shift in technicals could help the fed avoid an inverted curve, even if moving above their version, assumption of neutral.

jonathan: as we close out this segment, every single friday, if you went on vacation the last couple of months and only checked the market on friday, you would think nothing happened over the past week with the 2-year, and the 10-year either. this treasury curve seems to be stabilizing. i know we had a vicious week, but every friday over the past five, it is in or around 2.50. what is the signal you take from that? >> a couple of things. underlying fundamentals of growth, inflation, despite everyone's anxiety, is stable. on fed has largely been their game. but by historical standards, they are being very cautious. i think that is why the ultimate change that you are seeing, not the intraday, but often is quite muted. i will point out, to the point about treasury issuance,

treasuries are wide relative to the internals of the fed funds market. the fed funds swaps be on the 10-year point are already inverted. the focus may change as the fed fund rates go higher. people realize those expectations are inverting. jonathan: let's continue the conversation. coming up, the auction block. italy bringing some relief to the markets following this week's meltdown in the nation's bonds. elsewhere, live pictures of the white house where president trump is expected to meet with north korea's kim yong chol. this is "bloomberg real yield." ♪

jonathan: this is "bloomberg real yield." i want to go to the auction block were italian bonds have gotten a little bit of relief through the week. the company selling 3.6 billion euros worth of five and 10-year debt. substantially higher than at last month's auction. and there is this in politics showed up in europe, were in poland davis cup there only regular bond auction, leaving its calendar blank for the first time this year. in european corporate's -- >> we have breaking news right now he would we are looking at the north korean vice chairman of the central committee kim yong chol arriving at the white house. he is expected to meet with president trump to deliver a letter written by kim jong-un. we heard earlier from the wall street journal that the letter would be very simple, containing no significant concessions or threats.

this would be the biggest meeting in history when it comes to the significance of it, the most senior north korean official to visit the united states in 20 years. in itself, meeting with the president of the united states is pretty historic. we have heard that mr. kim had met with secretary of state pompeo in new york and that the negotiations showed real progress, according to the secretary of state. thejust saw pictures of vice chairman of the central committee of north korea kim yong chol arriving at the white house to meet with president trump. he is expected to deliver a letter written by kim jong-un with no significant concessions or threats. they met withknow secretary of state mike pompeo in new york. breaking news on north korea. we will get you those latest development as we get them. for now, back to real yield. the centralr not

bank can or will support a particular market. the difference between fair value within intervention and without intervention is a really big number. inathan: getting involved the price action on tuesday were resolve the market gap the two groovy lower in italy? >> definitely opportunities. unstable as the situation in italy has been, europe is very strong wooden. to 2012, 2013, 2011, they have taken on the steps to strengthen their system. a lot of those countries are reaping the benefits. growth is strong, the ecb is in a good place if they needed to support them. but the italians have to be in line, stay with the program. that was definitely in doubt. with all the countries seeing their spreads widen, portugal, spain, there are definitely opportunities there, even france. jonathan: liquidity evaporated

in one of the biggest bond markets on the planet. i wonder what the lesson should be in high-yield. always a sense that you can get when you need to. the fact is when you need to get out the most you cannot. do you apply any of the lessons that we have learned in the italian bond market to high-yield? >> to be honest, it is something we think about. we saw that during the many energy crisis in high-yield a few years ago. that is certainly not lost on us. that is something we keep in mind in all of our port all euros. jonathan: a difficult week as well for bill gross, the former bond king, having one of his worst days since the inception of janis. i caught up with him and asked what went wrong this week in terms of the strategy. listen to what he had to say. was thetrategy which basis of your question, has been a strategy that has been short german bund and along u.s.

treasuries. the spread between the two is historically high. 10-year,nce, on the u.s. treasury versus the 10-year the bund, 250 basis points. it's never been at that level. jonathan: that was bill gross from earlier. if you are expecting that spread too narrow and want to do it by shorting bunds and going long treasuries, how difficult is it? we have an incredibly distorted market in europe. we have an inflation print around 2% but bunds are negative about six years. is this just a widow trade over again? >> you can short them. whether you will reap a profit is a different question. i go back to the prior comment, to echo what you said. don't trade and valuation that have anything to do with the journeyman economic fundamentals, the trajectory of growth or inflation.

it is set by the ecb and overwhelming intervention through large-scale asset purchase programs. yes, they are running less than they were a year ago, expected to taper toward zero. our expectation is the ecb will have a debate -- a very difficult time exiting large-scale asset purchasing programs, even though they may whale dial it down. are not free to trade based upon economic fundamentals. challenging a relative value trade against a market that is less influenced by the central bank intervention. robert, your idea that maybe we have the widow maker all over again. this time it is german. >> the problem is there is the ecb in the market but there is a huge captive buyer base that has to stay at the top of the the the treasury market. they can look at all of these

different markets on a hedged basis. ,hen they are looking at jgb's in germany, when the bones are up half a percent, your financing are way below zero. there is actually a decent amount of kerry. there is a small amount of negative supply in boones. commodity.ike a gold to go in short them is obviously very dangerous despite the fact that some measures the yields are lower and may look expensive. 320than: that spread out to three years versus treasuries. i spent so much time asking that question, do you think it can stay that wide? >> the chances of it going wider have to be 50/50. ,he fed will be marching along presumably another 50, 100, 150 basis points. 2's are going to have to go with that movement. stuckb will probably be trying to get 20 42 years -- to

zero for two years. all the while, germany is running a slight surplus, so absolutely no supply. on the treasury side of it, massive amounts of treasury issuance. crude way ofretty capturing the transatlantic divide, the u.s. versus european economy. i guess there are not many better ways, comparing. ring trueg america for you, is that where people should be adding exposure to risk assets? for now u.s. high-yield has held it quite well, as i mentioned. european high-yield, we have been underweight this year, and we have been wrong for some time on european high-yield. tracks this week, as the widened versus italy, we took some of the protection off. away from italy, european fundamentals are still pretty healthy. u.s.,eing said, for the

we are not jumping up and down about high-yield at these levels. , if thingsecognize were to get worse in europe, we could see spreads widen. right now it feels like we're still pretty insulated. jonathan: mary bowers is with me, alongside robert tipp, and bob miller. , we will get a check on markets. 2, 10, 30 yields. down just a basis point after the week we have had. still ahead on the program, the final spread. the weekend ahead featuring the g7 summit as tensions spread around the world. this is "bloomberg real yield." ♪

jonathan: and this is "bloomberg real yield." over the next week trade will be front and center once again.

u.s. commerce secretary wilbur ross will be in beijing this weekend. the european union commissioner speaks in brussels. tesla hold its annual shareholder meeting. i'm sure we will find a little bit of time for that. still with me is robert it, mary bowers, and bob miller from blackrock. to get your thoughts into next week, some concerns after that stellar payrolls report, that we have to think about the fed going four or five times this year. what is the message not to fear the fed? >> one is the bond side. as bob alluded to earlier, this is a less liquid, later cycle environment. at this point of the cycle, typically the fed is moving the long-term yields have stabilized, but at the same time, your equity volatility tends to go up when the progress of the equity markets slow down. we are looking for a recession,

but as get closer to the end of the cycle, the equity risks will be rising. is not the pessimism way to go in terms of long-term fixed income. we are not at 1.5 on the 10-year note. jonathan: how do we know where we are in the cycle? people talk about late cycle. what is late cycle to black rock, are we there? >> that is a challenging debate. economically, with an on a floating rate below the natural level of unemployment, that would suggest that we are later in the cycle. as we also know based on history, that does not change until there is something that disrupts it, and then it is subject to change a lot. asancial markets strike us reasonable valuations and fixed income, likely to get cheaper over the next couple of quarters but not a lot. risk assets are reasonably valued but the growth trajectory is the harder question.

piling on fiscal policy at full employment, not exactly the policy prescription we would have suggested. we think it creates a larger risk of a boom-bust scenario where things may look good for the next several quarters and of the lack of organic replacement demand in years time could create deceleration risks. it is a tricky environment. the fixed income market is reasonably priced for the balance of outcomes. jonathan: i want to take the opportunity to wrap things up with some tricky questions. three rapid questions. the first one being, and italian election before year-end? robert? >> no. >> yes. >> no. through: long bpt's year-end? robert? >> i like both a bit. >> spain as well. >> can i short them both?

jonathan: the trump twitter account, the new leading perils indicator? yes or no? >> i would bet on volatility. no. >> hopefully not. >> no. jonathan: you all wanted to avoid that. we have pr in the corner. powers, bob mary miller, thank you. see you next time. for our viewers worldwide, this was "bloomberg real yield." this is bloomberg. ♪

>> nine mark crumpton with first word news. france's finance ministers as the u.s. is becoming increasingly isolated as president trump continues to push his america first trade

policy. he spoke to bloomberg tv at the g7 gathering in whistler, british columbia. we should have been united during the g7 to tackle the global challenges of the world appeared on thinking of course about growth, employment, development, and instead of that, we will be divided between not being a g7 but ag six plus one. u.s. impose new tariffs on steel and aluminum imports from some of its closest allies. the eu says it will take immediate steps to retaliate. can do impose tariffs on u.s. made motorcycles, whiskey, and orange juice. mexico will place to on everything from u.s. flat steel to cheese. mike parson will become missouri's 57 government today when eric greitens's resignation becomes official. he says he wants to assure people that everything is