jonathan: from new york city, i am jonathan. 30 minutes dedicated to fixed income. this is "bloomberg real yield". coming up, the jobs report leaving the federal reserve on track to deliver more hikes. bond investments and liquidity might not be there when they are needed. why this firm had its biggest one-day drop in four years. we begin with the jobs report. it is good news on all fronts. >> it is a good gain. >> the wage number was very

important and this is good news. >> wages are above .5%. still not strong. inflation is bouncing around so real wage growth is muted. people are dipping into savings to spend. that is worrisome. welcome news but still not 3% sustained. we are not seeing broad-based acceleration that we would like to see. that hawksnario basically think they can move once twice, some say three times, i say june is the last. >> we will go three to four times, probably four. jonathan: joining me is chief investment strategist, senior

portfolio manager at hsbc and bob miller, head of fixed income strategy at blackrock. great to have you with me. bob, i want to begin with you. it is hard to find any weakness here today. if you look hard enough, you can find something to be disappointed with but it is a great report. labor market is in a great place. it will continue to grow, not at the pace it has been, unemployment is headed toward 3.5, maybe a touch below and wages will move higher. -- peoplepeter all are trying to poke holes in it. data seems to backup strength. mary: you would not think of high yield as being a safe haven but high yield relative to other regions has held well. ccc's more so. the problem has been rates.

when we get a job number today, it keeps us cautious and keeps us liking the ccc. jonathan: in terms of rates, it has been a strange week where looked at rate hikes. robert: we saw in 2015 that when you have the crisis in china china's currency. we saw in january, when there is stress in the market, people begin to price that out. that is correct of the market to figure that the fed may get dragged into this because italy is a big country. the european project is 20 years old, celebrating their 20th anniversary. it could be a systemic shock. that makes sense. but as soon as you get past the peak of that crisis and start to go back to the fundamentals on the ground, it is good.

jonathan: why do have this spread? we got used to this a couple years ago but no -- but when things recently narrowed. away but this gives you an indication that this market does not believe the federal reserve can go for it is predicting. where is blackrock? bob: we think the fed is moving. colleague on the clip earlier said, we think it will move up to four times this year total. we do not think they are going .uch above 2.5 the market is priced for a 2.5% terminal rate. the gap in the dots. the market is a probability weighted pricing mechanism so it includes probability of higher

rates and lower rates. the long-term mutual rate in this country is under debate. there is a fiscal policy impulse that is kicking in likely to impact growth and inflation for the next several quarters. , wehe overall medium term just don't think rates are going as high. jonathan: do you agree? robert: i see them going higher. they had the scope. perceivedget to a day to be neutral, the onus of proof will rise. you are in a world where less people are thinking, two or three of these are not high interest rates but around the world, rates are low. after being as high as 65 basis

points, we're down to 20. we are in a low interest rate world. i think that will slow them down. once you get to the 2.5 area. jonathan: negative all the way out to six years. america's concept of the federal reserve gradually moving through neutral. moving through neutral, how key is it for the federal reserve to get to a point where it can move through neutral? for a long time now, we have had accommodative federal reserve policy. mary: it is interesting and as we have seen the fed move toward a goodeld, we have seen amount of outflows from asset class. spreads have been fairly stable but certainly as rates rise, some of the more levered markets could see headwinds in terms of the cost index. jonathan: i saw a piece from a

professor on twitter. he pointed out the tension in the market. the federal reserve is talking about moving through neutral. the market does not i it. it thinks the federal reserve is nervous about inverting the yield curve. they will have to invert the curve to go to neutral. can the federal reserve get through neutral without inverting the curve? bob: it is possible. one of the important factors that will influence that outcome is out of the fed's control. treasuries insurance -- treasury issuance. far, they have not extended the duration of the weighted average maturity and they are probably likely to do so in the near term. a shift could easily help the fed avoid an inverted curve even if they move above neutral. jonathan: as we close this

segment, every friday, if you want on the occasion the last couple months and only checked in on friday, you would think nothing had happened. and hardly much has happened on a 10 year either. this curve has suddenly stabilized. we have had a vicious week but over two years, every friday over the last five is in or around 250. what do we take from that? robert: what is the underlying , despiteals everybody's anxiety, are pretty stable. it is a good environment and the fed has been on their game but by historical standards, they are being cautious. change why the ultimate is quite muted. treasuriest out that are applied relative to the

internals of the fed funds market. the fed fund swaps beyond 10 years are inverted. and the focus% may change as the rate gets higher and people realize is expectations are inverting. jonathan: let's continue the conversation. coming up, the auction block. bringing some relief to markets following this week's meltdown. this is "bloomberg real yield." ♪

jonathan: this is "bloomberg real yield." i want to head to the auction block where at italian bonds have gotten relief. bonds with anld average yield substantially higher than last month. poland, they may scrap its only regular bond auction for june, leaving its calendar blank for the first time this year. euros of bonds were sold across may, a decline of nearly 50% versus one year earlier. the slowest week for sales this year. my guests are still with me. bob, let's get your thoughts. take away from europe.

the lack of liquidity evaporating. what lesson do we learn? at a broad level, the markets are much less forgiving. beforee mentioned this on this show. six-yearon of the thatssive monetary policy provided a tailwind for all financial assets is changing. u.s. changing most in the it also changing globally. markets are less forgiving than i have been and i don't think that will change soon. with respect to italy, it highlights the degree to which that market is based on aggressive bond market valuations. a function ofrily aggressive monetary policy intervention. unconventional policy pursuits. when there is a question about

whether or not the central bank can or will continue to support a market, the difference between fair value with intervention and without intervention is a big number. jonathan: did you try to get involved in the price action? robert: there were definitely opportunities there. is,nstable as the situation europe is on strong footing. compared to 2012, they have taken phenomenal steps to strengthen their system and a lot of those countries are reaping the benefits. growth is strong. italians had to stay with the program and that is now in doubt. with other countries seeing spreads widen, there are opportunities there. totally: liquidity evaporated in one of the biggest

bond markets on the planet. what should be lesson before anyone in high-yield? there was always the sense that you can get out when you need to but when you need to get out most, you cannot. do you apply the lessons we could've learned this week to high-yield? mary: to be honest, we think about it a lot. we saw that during the mini energy crisis in high-yield a few years ago. that is not lost on us. it is something we keep in line -- in mind in our portfolios. bad week forwas a the former bond king. up -- i have caught up and asked him what went wrong. listen to what he has to say. has beenr strategy

long on treasuries. the spread between the two is historically high. on the 10 year, u.s. treasury versus bond is 250 basis points. it has never been at that level. jonathan: that was bill gross. bob miller, if you are expecting that spread to narrow, how difficult is it to be sure? we have an incredibly distorted market. inflation south of 2%. can you short? bob: you can short them for sure. whether you will reap a profit is a different question. i go back to what you just said. the market does not trade at valuations that have anything to do with german economic fundamentals. oflation is a consequence

intervention through large-scale asset purchase. they are running less than they were a year ago and are expected to taper toward zero. we expect ecb to have a over the time exiting next 3-6 months. they may dial it down into 2019. trademarkets are not free based on economic fundamentals. it makes challenging a trade less influenced by central bank intervention. have the widowy maker all over again but this time it is german. robert: there is the ecb in the market but a huge cap in buyer base that has the top end of the treasury market. they can look at all these different markets on a hedged basis and when they're looking

at the five basis point yield in up .5%, there are is a decent amount of carry and negative supply. these things are like a commodity. despite theangerous fact that some measures show yields are low. bunds versus treasuries, can it stay that wide? robert: the chance of a going wider have to be 50/50 along, will be marching presumably another 150 basis points. the ecb is probably going to be stuck trying to get to zero for two years. that spread will be under is facing a germany

surplus, there is no supply and on the treasury side, a massive amount of issuance. jonathan: it is a pretty crude way of capturing the transatlantic divide. but there are not many better ways to do it then comparing bunds to treasuries. does by america bring trail at the moment? is that where people should adding exposure? mary: for now, yes. european high-yield has been under this year and we have been under -- we have been wrong for some time. it did widenweek, on italy. we took some of that protection europeanse fundamentals still look healthy. jumpingu.s., we are not up and down about high-yield and

we recognize that if things were to get worse in europe, he could see spreads widen but for now, we feel insulated. ,onathan: sticking with me mary, robert, bob. next up, where bonds have been this week. believe it or not, after the week we have had down just one basis point. on the program, the final spread. the week ahead as trade tensions spread. this is bloomberg really ill. -- "bloomberg real yield". ♪ ♪

this is "bloomberg real yield." it is time for the final spread. over the next week, trade will be front and center.

the u.s. will be in beijing this weekend. leaders meet at the g7 summit in quebec. its annual shareholder meeting. i am sure we will find time for that. still with me, robert, mary, and bob. get into next week, there may be concerns after that payroll report that we have to worry about the fed. what is the message to not fear the fed? robert: one is bond side and the other is that this is a less liquid, later cycle environment. at this point, typically the fed is moving but the yield long-term yields have stabilized. fixed income products tend to perform well. equity volatility tends to go up and progress in the market tends to slow down. for obsessionking

but as you get closer, the risk will be rising. the pessimism is not the way to go for long-term fixed income. we are not at 1.5 on the 10-year note. jonathan: how do we know what you are in the cycle? i hear people talking about late cycle. what does that mean to blackrock? bob: it is a challenging debate. economically, with unemployment rates below the natural level, that would suggest we are later in the cycle. as we know based on history, that does not change until something disrupted and is subject to change a lot. asancial markets strike us reasonable valuations in fixed income. likely to get a little cheaper. assets are reasonably valued but the growth trajectory is the heart -- is the harder

question. think it creates a larger risk of a boom bust scenario where the outlook is good for the next several quarters than the lack of organic replacement demands could create deceleration. buts a tricky environment in the fixed income market, it is reasonably priced for the balance. jonathan: i want to wrap things up a tricky questions. an italian election before year end? robert: no. mary: yes. bob: no. jonathan: long btp's or long spain through year-end? robert: i like them both. spain is easier. mary: spain. bob: can a short them both?

jonathan: is the trump bidder account the new lading payroll accountr -- trump after the new leading payroll indicator? mary: hopefully not. bob: no. jonathan: great to catch up with you. bob.t, mary, that does it for me in new york. we will see you next friday at 1:00 p.m. new york, 6:00 p.m. london. this is numbered tv. -- this is bloomberg tv. ♪ retail.

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