jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." jonathan: coming up, solid payrolls growth shows there is still more room to run for america's labor markets. shots fired in the u.s.-china trade standoff, newly implanted trade tariffs hanging over investor sentiment, and trade-off brings one more use to flatten the curve. the flattest since 2007. we begin with a big issue, another solid payrolls report. >> i think this is a very solid report. >> that was pretty encouraging. >> a great jobs report.

>> certainly a very good jobs report, no doubt about that. >> it would look like it is bad news when the unemployment rate rose up. but if it goes up because people are quitting their jobs more and heading back into the labor force, which is really what we saw in the data, it is a really, really strong market. >> it is an all-around good news story, at least for the near term. >> this won't change the fed to change course by itself. 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 it 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 still sluggish. >> the fed is going to go -- i would argue they will go another two times this year, but i wonder how they are going to go if the economy starts to bend down a little bit and the curve -- and the front end of the curve today is pricing in pretty close to the peak of where you will go. jonathan: joining me in new york city is ira jersey and krishna

memani from oppenheimer funds. coming to me from london, iain stealey. krishna, let's begin with you. solid, solid, solid. it's all i heard this morning. is that what it is? krishna: it was across the board, reasonably good. good for risky assets, for sure. good growth in employment. so telling us overall economic growth is decent. wages are stable. so everything is playing out according to plan from the fed 's perspective. jonathan: iain stealey i was looking at the numbers this morning and everyone turned around and said they were absolutely solid, but through the week, it was the least anticipated payrolls report i've seen so far in 2018. why do you think that was? iain: i think it was one of those things that when you look at the major issue, jobs in the u.s. are fine. everyone is focusing on tariffs, everyone has been concerned about trade, and and that is what has been driving the

market. i would agree with what was said on the payroll report. it was solid. it had a little bit of everything, good job growth, but the wages did not tick up. that probably means the fed does not need to go any quicker than what they are doing at the moment. what we are seeing is risk assets have done really well on the back of it? jonathan: -- back of it. jonathan: fireeye? -- ira? if you look at the paycheck of the economy, this is a chart i look at. you can look at the hours worked, the amount of people working, how much they get paid 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. krishna: i think job growth is good. i think the differences this is happening at 3.5% unemployment rate as opposed to 5% or 6% or 7%. that is the most remarkable thing.

and it gives water to the thing that the fed does not really have to tighten. maybe in 2019, they will be backing off the path they are down. jonathan: it raises an important question. i remember moving to the united states a few years back and i was told get ready for payrolls growth to moderate. we are not going to be able to continuously print 200k, 200k. guess what we are doing? we are printing 200k. how is that still possible? i think it shows there is a lot of slack in the economy, and you saw it today. a great number, but the unemployment rate goes up and the participation rate goes up. it shows there is still slack , which is why the fed is slowly, to go fairly keeping this glacial pace as opposed to historical cycles. we think that continues. we could well see some good prints going forward as well. ira: i think krishna is right. i think 2019 is when we will see the end of hikes. one of the questions is, when the curve starts to get flatter,

because the federal reserve continues to hike, even with these good jobs numbers, you wind up getting fears of a recession. flat curves, two to four years, before tend to precede a recession. so the question then becomes how worried is the fed about that. you heard the minutes yesterday, the fed is looking at it. the fed is worried and looking at the curve. but there is not much they can do about curve flattening except changing policies. jonathan: the consensus view for most people in the market and certainly most people who sit around the table with me is to flattener. i am not asking the question, how much juice is left to squeeze and how much upside is there left in two-year yields? krishna: if it is as flat as it is, the amount of juice is iso doubt already, so it really very small. what that is telling you is that basically, the fed will be forced into stopping unless they

want to get into a recession. if it inverts further, that means recession is coming down the pipe because they are going down the path of policy tightening in a meaningful way. jonathan: i've heard this argument of the past several months, but i do not see a federal reserve that is too worried. certainly 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? iain: i think they will keep going for a while. when we look at what is going on in the economy, it is a very different environment 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 cap's that premium in the long end, and i think that is what has kept yields down. what will be interesting in the curve is the second half of the year. if you look at it today, it is 30 basis points. role and carry which is so in around about is seven bits a quarter. you need that to be at 15 basis points for the flattener to make you money.

yet, we are in an environment where we will see all this supply coming. we are seeing quantitative tightening out of europe, so will we see the demand for long end bonds? i would not be surprised if we see some near-term steepening. jonathan: this is a curious situation, that the federal reserve has not gotten us to a real rates world yet. they have not gone through neutral yet, yet we are having a conversation about the federal reserve perhaps having to stop next year. why? krishna: this is a new world. that is fascinating. the fed was trying desperately to get real rates up and the markets want no part of it. and i think the structural issues we saw, because the things we saw are quite good, but the structural issues we want to sweep under the carpet. they are not going away. i think this is going to be with us for a long period of time. real rates are not rising meaningfully. if they rise meaningfully, we will have a recession. the fed does not want that at all. jonathan: is in a new world? ira: it absolutely is a new world. one of the things we have to ask

ourselves is are we at neutral? you said maybe we are not at neutral yet, maybe we are. there is no way to actually -- you know, there are tons of different estimates, right? my estimate for the real rate might be 3%. two more hikes, we are there. that is not saying very much. but other people might think it is 2%. hash would mean the fed already reached neutral and we will be tightening. so you look at things like the yield curve. i think field curve point is very important because one of the reasons term premium is so low and premium terms are so flat is because we are nearing the real rate being met by the front end. as we do that, if the fed keeps on tightening effectively, they are tightening beyond the neutral rate, and that is where policy mistake comes in. jonathan: krishna, what do you think of people who turn around and say the long end of the curve is capturing the global bond market story, the trade story has been just another excuse to demolish the curve even flatter? if i got rid of the trade story today, just like that, where

would the 10 year yield be and how much steeper with the curve be? krishna: i think it would be slightly steeper, but i think the likelihood that it would be at 3.5% or 4% is not in the context. with or without trade, the key issue is there are structural issues facing the global economy. it is not just trade related pressures. inflation is not rising globally to a meaningful level. that is not something that is going that way. -- going away. jonathan: so let's explore this further. if you think the federal reserve gets to a point where they need to slow down, what stops first? the balance sheet unwind or rate hikes? krishna: oh, the balance sheet unwind, in my judgment, will stop first, because that is something they are already talking about to some extent. because of reserve problems or something like that. with all of these things they have created with new regulations, i do not think they have a pretty good idea of how reserves are being used and they are at a loss to explain the current situation. jonathan: what is the

methodology to understand what should be the appropriate level of the balance sheet? how do you do the math on that? how do you know? are we just putting our finger in the sky, 2.5 trillion dollars, $3 trillion, what is it meant to be? ira: realistically, the only way you can know the balance sheet is when reserve demand picks up. this is why there have been discussions about that. 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 rate. but this spring, right after they'd started to unwind the balance sheet, you started seeing the effective rate, the actual traded fed funds rate start to creep higher and higher and higher. because of that, they said oh, this is a reserve problem. i do not think it is. i think there are other factors, but this is one reason why some academics and some others are talking about stopping the unwind. you.han: ira jersey, thank great to have you with us. from bloomberg intelligence, sticking with me. coming up on the program, this

week's treasury builds sales suffer a mini massacre. we will explain. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now, where there was a condensed treasuries schedule due to the holiday shortened week. the weekly auction of four-week bills saw investors place bids for two to five times the amount offered. treasuries also sold $48 million of three-month bills with a 2.62 ratio. the bit to cover ratio was the lowest level in a decade. meanwhile, in junk bonds, $15 billion was priced in june and making it the slowest issuance for that month since 2013. high-yield also posted the slowest in eight years.

second quarter finally, in europe, corporate debt sales had the worst in seven years. first half issuance of investment grade corporate bonds slumped 30%. this week, an interesting piece hsbc steven major, highlighting the unfolding credit squeeze. in a note that his team wrote, 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. when viewed alongside the decoupling of growth half, tightening u.s. financial conditions and repricing of risky assets, we have all the hallmarks of a slow motion credit crunch." still with me to discuss is ira jersey from bloomberg intelligence, krishna memani from oppenheimer funds, and iain stealey from -- asset management. iain, what do you make of that? we are starting to see financial conditions tighten. and maybe, in the terms of the team at hsbc, a slow mo credit crunch? iain: he is completely correct.

we have seen this kind of list of idiosyncratic events that have built up and they have hurt risk assets. and we are seeing some significant underperformance. i feel like when we look especially in the u.s., especially what is going on there, we could well see q2 could print close to 6% of a nominal gross number. that is still a good environment for credit and i believe areas for the high-yield market and , like you highlighted, very low issuance this year, there is the ability for that market to perform. i still think those spreads are attractive enough to the default -- and the default rates are low. even if it is a slow-motion credit crunch, you have a lot of carry baked into that sort of market. jonathan: low insurance can be a positive or there is an argument to say we have so issuance right now because they can't come to market at the price they like. krishna: indeed, indeed. i think if iain likes the high-yield market, he must like the high-grade market. the contrast between the two markets in the u.s. is extraordinary. jonathan: what do you make of

that right now? krishna: i think the investment grade market is driven by two things. rising rates and then a whole lot of issuance that basically killed that market. high-yield where issuance was relatively low and not as rate sensitive, defined more equities and equities are ok, and that is a good thing. but i think your point about emerging markets and tightening financial conditions and non-us markets, that is real. and that is something the fed may not care about, but i think by 2019, they will have no choice but to care about. and i think that is where the transition will take place. jonathan: and that is what i want to explore, whether the feedback loop is still sort of there, whether we can get a u.s. economy that responds to what is happening in european high-yield and an emerging market high-yield and asian high-yield and whether there is feedback risk into u.s. credit. right now, on the screen, equity bonds just completely rolling over. enthusiasm about the u.s. economy and u.s. high-yield

being the place to be, does that change? iain: i do not think it does and i would sort of disagree on the investment grade side and the high-quality side. when we look at investment metrics in -- when we look at credit metrics in investment grade, there is a reason it has been selling off in the u.s. we have seen leverage ratios picking up. it has been classic late cycle behavior but we are not seeing that in the high-yield market. high-yield market leverage ratios are still coming down following the energy crisis. there is a bit of a disconnect and that is why we have seen the underperformance. when we look at the rest of the world, the european market looks pretty healthy to us on the investment-grade side, but you have got the elephant in the room. the ecb. they are going to stop buying corporate bonds at the end of the year. whereas the high-yield market in europe, it doesn't have that impact. they have not been buying high-yield bonds. it has been a bit of an unloved market and now it trades at a wider spread to the u.s. that has a good opportunity over the next six months. jonathan: what do you make of that? krishna: with respect to leverage, yes. i think the leverage of u.s. hybrid market has gone up, but that coverage ratio is quite

reasonable because of the high level of profitability. so i disagree that reflects credit concerns in the market. it is a supply issue far more than anything else when you have lots of large m&a transactions coming through the system, with into a market where flows into mutual funds have been pretty slow. the math is easy. jonathan: we are talking about a slow-motion credit crunch, the federal reserve, as we can debate whether they have gone neutral or not, but let's assume they have. not by very much. my question, how are we going to even 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? that is the debate right now, really? iain: first, they have to get rid of their quantitative easing program. you know, slowly but surely, they are reducing that. and one of the ironies is if we wind up with 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. where -- how do you quantitatively tighten? how do you raise interest rates in an environment where you have credit conditions that are tightening so much? that is a big problem for central banks. and that has been a problem, quite frankly, for japan for the past 20 years. when you reach the zero bound, there's a limited number of policy options that you have and thoseb might face exact same policy options. krishna: i think the ecb has even more challenging case from a cyclical standpoint. growth outlook is decent. we are talking about 5% or 6% of nominal growth, that in ecb terms and in real terms is kind of 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 whatsoever to raise rates in this go around. , greatn: krishna memani

to have you with us from oppenheimer funds, alongside ira jersey from bloomberg intelligence. i want to get a check on where the market has in, treasuries, 2-10's. two year yield up by a mild two basis points. there is your curve flattening. down three on a 10 year yield. five on a 30 year. still ahead, the final spread. the week ahead featuring comments from mario draghi and the new numbers on u.s. inflation. much more in that. from new york, you are watching "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up over the next week, we will hear from the ecb president 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.'s prime minister, theresa may. still with me, ira jersey, krishna memani, and iain stealey. just some final thoughts on the inflation story. out of everyone i've spoken to, you have been out front, saying we will not get inflation, overshooting and to the upside in any aggressive way at all. where do you see things going now? krishna: from a cyclical standpoint, we are going there and we may actually overshoot the 2% target. i wouldn't be surprised. but i think the fed is being really smart and wise and basically making up stories to make sure they do not use the data point to tighten policy aggressively. and i think 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 -- ira: it is not like the market is telling you there is going to be runaway inflation. you look at inflation breakevens and 10-year inflation breakevens at 2.15%, that is not

runaway inflation. if you saw the breakeven curve of being very steep, that be something to be concerned about where the fed would be fighting more. the market is telling you that inflation is not really an issue. jonathan: do you have a better understanding under chair powell than you did under chair yellen? iain: i think the reaction front will be very similar. he will look at the data, analyze what is going on, and the ultimately the view -- is that inflation is going to remain meek near-term. it could pick up because of base effects. but 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's of this world, and low inflation globally. there is no inflation across europe. there is limited inflation across areas like japan and that is going to weigh down global inflation. think they're going to monitor the data but they are not want feel they not want to have to go any quicker, i think they are going to look through those. jonathan: and given here in the

united states, the output numbers are so good, that cannot be a problem. ira: it is not a problem. that is one of the ironies here. you can have real growth that is ok, low inflation. it is an overused term, but it is a goldilocks kind of economy where you do not have runaway inflation and you do not have an employment problem. jonathan: guys, it is time for the rapidfire round. you know how we wrap up the program. you go into the boxes with short, sharp questions with quick answers. does the two tens curve -- does 2-10 curve invert before the end of the year, yes or no? ira: no. krishna: no. iain: no. jonathan: have we seen the lowest unemployment curve of the cycle? ira: no. krishna: no. iain: no. jonathan: that was an easy one. can the fed hike five more times without the ecb hiking once? ira: no. krishna: absolutely not. iain: i think they can. jonathan: raising some big questions. great to catch up with you.

ira jersey from bloomberg intelligence, krishna memani from oppenheimer funds, and ira: -- iain stealey joining us from jpmorgan asset management. from new york city for audiences worldwide, that does it for us. we will see you. from new york for our audience across the planet, this is "bloomberg real yield." ♪

jonathan: -- david: you get a call from steve jobs. tim: there was a sparkle i'd never seen in a ceo before. david: did your friends tell you was not a good idea? tim: it was not. david: does warren buffett still use a flip phone? tim: i told him i will personally come to omaha to do tech support for him. david: you exposed your own personal life a bit. tim: i thought i was making the wrong call. david: why is it called the apple watch and not the iwatch? tim: i like apple watch. david: well, you are the ceo, so. [laughter] >> would you fix your tie, please? david: well, people wouldn't recognize me if my tie was fixed, but ok. just leave it this way. gh