jon: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is bloomberg "real yield." ♪ coming up, solid payrolls growth shows there is still more room to run for america's labor markets. standoff,hina trade and trade-off brings one more to flatten the curve. another solid payrolls report. >> this is a very solid or appropriate -- solid report. >> very good jobs report, no

doubt about that. >> if the rate goes up because people are quitting their jobs more and heading back into the labor force, it is a really, really strong market. >> all around good news story, at least for the near term. a few more reports in this direction, if we do see a wave of people coming back to the labor force, i would not expect that, but as i does seem to be the case, it could cause an adjustment in their thinking. >> the fed will hike at least once more. why not more than that? simply because wage growth is sluggish. >> the fed is going to go another two times this year, but i wonder how they are going to go in the economy starts to bend down a little bit and the curve starts. jon: joining me in new york city

, iain stealey and krishna memani. coming for me is london -- in --don solid, solid, solid. krishna: it was across the board, reasonably good. good for risky assets, for sure. good growth and employment -- in e,p;pu -- .mployment for jon: it was probably the least anticipated payrolls report so far in 2018. why do you think that was? iain: when you look at the major issue, jobs in the u.s. are fine. tariffs,is focusing on and that is what has been

driving the market. little bit of everything, good job growth, but the wages did not tick up. what we are seeing id risk assets have done really well. at,his is a chart i look you can look at the hours worked, the amount of people they get paiduch per hour, and this is growing at the same rate that we did before the crisis. saying this is a solid number in some ways is a little bit of an understatement, this is really on trend and a good number when it comes to job growth for you -- job growth. the difference is this is happening at 3.5 percent unemployment rate as opposed to 5% or 70%. -- or 7%..

the fed does not have to tighten, maybe in 2019, they --l be backing off for you backing off. jon: it raises an important that we arewas told not going to be able to continuously print, guess what we are doing? 200,000, how is that possible? the markot of slack in et. slackws there is still was is why they are going very slowly compared to historical eycles, and we could se good prints going forward. >> to 19 is when we will see the

end of hikes. when the curve starts to get to even with these good jobs numbers, you wind up getting fears of a recession. they tend to precede a recession comes of the question becomes how worried is the fed about that. you heard the minutes yesterday, the fed is looking at the curve. there is not much they can do about curve flattening exceptions policies. for people is to , and i amlattener not asking the question, how much upside is there in two-year yields. as it is,s as flat the amount of juice is sucked out. be forced into

stopping unless they want to get into a recession. further, recession is coming down the pike because they are going down the path up -- of policy tightening. argument, iard this do not see a federal reserve that is too worried. they are looking at the yield curve but they were not stopping at 50 basis points, they are not stopping at 30. when do they stop? >> i think they will keep going for a while. a very different environments to other cycles because you have the big amount of money coming into the market from the european central bank, the bank of japan that caps that premium. interesting in the curve is the second half of the year. today, 30 basis points. be at 15that to basis points for the flattener

to make your money. qe occurring out of europe, it e. a -- it is immens the federal reserve has not gone through neutral yet, yet we are having a conversation about the federal reserve having to top next year. why? >> this is a new world. was trying desperately to get real rates up and the markets want no part of it. the structural issues from a -- the structural issues we want to sweep under the carpet. they are not going away. this is going to be with us for a long time, real rates are not rising meaningfully. if they rise meaningfully, we will have a recession. jon: is in a new world? ira: it absolutely is a new

world. maybe we are not a neutral yet, maybe we are. --re is no way to actually there are tons of different estimates, my estimate for the %, two te might be 3 more hikes, we a re there. you look at things like the yield curve. the reasons term premium is so low is because we are nearing the real rate being met by the front end. that, if the fed keeps on tightening, effectively, they are tightening beyond the neutral rates. that is where policy mistake comes in. peopleat do you think of to turn around and say the long end of the curve is capturing the global bond market story, the trade story is another excuse to demolish the curve even flatter if i got -- even

flatter? the likelihood that it would be at 3.5% or 4% is not in the context. trade, the key issue is there are structural issues facing the global economy. it is not just trade related pressures. inflation is not rising global lead to a meaningful level. that is not something that is going the way. jon: if you think the federal reserve gets to a point where they need to slow down, what stops first? balance sheet or rate hikes? unwind, balance sheets because reserve problems. with all of these things they have created with new regulation, i do not think they have a pretty good idea of how reserves are being used and they are at a loss to explain. methodology toe

understand, what should be the appropriate level of the balance sheet? how do you know? are we just putting our finger in the sky, what is it meant to be? realistically, the only way you can know the balance sheet is one reserve demand picks up. what happens is there is this interest on excess reserves and that was set at the upper bound of the range that the fed is trying to set the fed funds , right aftering they'd started to unwind the balance sheet, you started seeing the actual traded fed funds rate creep higher and higher, and because of that, they said this is a reserve problem. thinkot think it is, i there are other factors, but this is why others are talking about stopping the unwind. jon: ira jersey, great to have with us. coming up on the program, this week's treasury build sales

suffer. this is bloomberg "real yield."

♪ jon: i am jonathan ferro. this is bloomberg "real yield." there was a condensed treasuries schedule due to the holiday shortemened week. ds,estors paid bi treasuries also sold -- the nd for both auctions at the lowest level for a decade. $15 billion was priced in june and making get the slowest issuance for that month since 2013.

high-yield also posted the slowest quarter in eight years. issuance of investment grade corporate bonds slumped 30%. this week, an interesting piece came highlighting the unfolding credit -- they said the following, over the last six months, we've compiled a long list of individual surprises to appear to be more than coincidental. u.s. financial conditions and three pricing of risky assets, we have all the hallmarks of a slow motion credit crunch. stealey.emani and iain iain, what do you make of that? we are starting to see financial conditions tighten. crunch?o credit iain: he is completely correct.

we have seen this idiosyncratic events that have built up and they have hurt risk assets. we are seeing significant underperformance. i feel when we look in the u.s., printld well see q2 could close to 6% of nominal gross number. that is still a good environment for credit and i believe areas for the high-yield market and very low issuance this year, there is the ability for that market to perform. those spreads are attractive enough to the default rates are low. even if it is a slow-motion credit crunch, you a lot of carried they -- kerry -- a lot of carry baked in. jon: they cannot come -- iain likes the high-yield bondt, he must like the

market. jon: what do you make of that? krishna: investment-grade market ,s driven by issuance --h-yield low issuance high-yield where it issuance was very low, defined more equities and equities are ok, and that is a good thing. the point about emerging markets and tightening financial conditions and the non-us markets, that is real. that is something the fed may not care about. by 2019, they will have no choice but to care about. jon: whether the feedback loop is still sort of their, whether u.s. economy response and whether there is feedback into u.s. credit. right now, on the screen, equity bolts rolling over. placeigh-yield being the

to be, does that change? think it does and i would disagree with the investment rate. there is a reason is been selling off in the u.s.. late cycle behavior but we are not seeing that and the high-yield market. high-yield market leverage ratios is coming down following the energy crisis. world, the the european market looks healthy to us on the investment-grade side, but you have got the elephant in the room. the ecb is going to stop buying corporate bonds at the end of the year. spreadtrades at a wider to the u.s., that has a good opportunity over the next six months. jon: what do you make of that? krishna: with respect to leverage, yes.

is quitecoverage ratio reasonable because of the high level of profitability. i disagree the that reflects credit concerns in the market. it is a supply issue far more than anything else when you have a large m&a transactions coming into the system. the math is easy. jon: we are talking about a slow-motion credit crunch, the federal reserve -- let's assume they have. my question, how are we going to get an ecb that can get away from negative rates when we are having a conversation right now about whether they moved by 10 basis points in september or december of next year. first, they have to get rid of their quantitative easing program. slowly, they are reducing that.

we wind up with a financial conditions continuing to tighten like they are, you wind up with a situation where the ecb cannot do anything except potentially reverse the quantitative easing program. how do you quantitatively tighten? how do you raise interest rates where you have it tightening so much? that has been a problem for japan for so many years. ofre's a limited number policy options that you have and the ecb may face the same options. krishna: ecb has even more challenging case from a cyclical standpoint. growth outlook is decent. 5% or 6% of nominal growth, that an ecb terms is rolling over. it is a really big challenge, it may indeed be that the fed stops tightening at some point and the ecb does not get any opportunity to raise rates in this go

around. us, great to have you with ira jersey from bloomberg intelligence. twosuries, to tends -- year yield up by a mild two basis points. still ahead, the final spread, the week ahead featuring comments from mario draghi and the new numbers on u.s. inflation. from new york, you are watching bloomberg "real yield." ♪

♪ jon: i am jonathan ferro. this is bloomberg "real yield." it is time now for the final spread. we will hear from the ecb president's mario draghi and get a new reading on u.s. inflation. plus, we have a rate decision in canada, u.s. bank earnings, and political meetings in europe including the one between president donald trump and the

u.k. prime minister theresa may. , ira jersey, krishna memani, and iain stealey . just some final thoughts on the inflation story. to,yone i've spoken out front.en what do you see things going now? a cyclicalom standpoint, we are going there and we may overshoot the 2% target. the fed is being really smart and basically making up stories to make sure they do not use the data point to tighten policy aggressively. that is the right thing to do from a policy standpoint. otherwise, they wind up with policy mistakes. >> it is not like the market is telling you there is going to be runaway inflation. ,0-year inflation breakevens that is not runaway inflation. if you saw the break even curve

of being very steep, thou be something to be concerned about where the fed would be fight -- i think more. the market is telling you that inflation is not really an issue. have a better understanding under chair powell than you did under chill yellen -- chair yellen? >> i think it will be very similar. he will look at the data, analyze what is going on, and inflation is going to remain meek near-term. longer-term, the u.s. inflation is going to be low and that is going to be kept down by all of the cyclical structural impacts of low-cost providers, the amazon of this world, and low inflation globally. inflationimited across areas like japan and that is going to weigh down global inflation. they are not want to feel they have to go any quicker, i think they are going to look through those. jon: the applet numbers are so

good, that cannot be a problem. >> it is not a problem. you can have real growth that is ok, low inflation. it is a goldilocks kind of economy where you do not have runaway inflation and you do not have an employment problem. the boxes witho short, sharp questions with quick answers. inverts two tens curve before the end of the year, yes or no? >> no. >> no. >> no. jon: have we seen the lowest unemployment curve of the cycle? >> no. >> no. >> no. jon: can the fed hike five more times without the ecb hiking want? >> no. >> absolutely not. >> i think they can. jon: ira jersey, krishna memani,

-- iain stealey joining us from new york city for audiences worldwide, that does it for us. we will see you. from new york, this is bloomberg "real yield." ♪ phones have made our lives effortless.

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with president trump's promises. there have been reports that kim can wrap up the weapons production before the summit. , someing to a report customs department were awaiting official guidance from the government on imposing tariffs on chinese products. trump visits the u.k. next week, he will avoid london as much as possible to avoid protesters. visit theent will family home of the royals for 1000 years. he will meet theresa may at the country estate, but he will spend one night in london. their searcpended