jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "real yield." ♪ jonathan: another solid jobs report in line with the federal reserve's outlook for gradual hikes. larry coker says the president

will not back off china. china stepping in, closing in on a record weekly losing streak. we begin with the big issue, another solid jobs report. >> this truly is solid as a rock. >> a good jobs report today. >> the big surprise this year is that the amount of jobs added per month on average is accelerating. the whole same was that job growth will go down towards 100,000. and it jumped from last year. >> we are eventually going to have to see a ratcheting down of job growth to around 100,000-125,000 a month given our demographics and what we are doing with the immigration policy, given aging of the workforce. >> we will see folks pulled from the sideline. if you look at the underemployment rate, it has dipped down to 7.5% but there is still some slack. >> we will downshift to 120,000 jobs. you are just running out of available labor. >> there are still a lot of americans out there it could come back into the labor force. i like that. i think our potential to grow is very strong. with the right incentives i think we will get them back working. jonathan: joining me is mary bowers, krishna memani, and

coming to us from minneapolis is bryce alan doty. mary, your thoughts on the payroll reports. it feels like a bit of a snoozefest. and not because it is back, but because it is good and we are used to that. mary: the whole week is felt like a bit of a snoozefest. everything kind of seemed to come in line. krishna: that has been the case for quite some time. the economy continues to do well. employment is doing well because of the stimulus we are passing through the system. if there was not trade, there would not be much excitement in the market to begin with. jonathan: we will get to the trade story in a moment. bryce, your opinion on what's happening? data supports the theory there is some slack out there. the economy can generate 200,000 payroll growth every month. there is no real sign of inflation pressure. bryce: i think the slack story is the big thing.

the big surprise is the drop of the underemployment rate. 7.5%. the last time it was that low we were at the height of the tech boom. that's an indication maybe the slack is running out. that number includes people that are part-time, wish they were full-time or they want a job but have given up looking. now that has come down so much, we might see some wage inflation. the last time they got this low, wage inflation accelerated to 4%. we are nowhere close to that but maybe now we will start to see some uptick in the wage growth. jonathan: that hawkishness is a lot lower than people believe it to be. krishna: yes, but the concept of the slack in the system, there is a case to be made that may not be true. look at the case of japan where they don't have that much slack in the system. despite that, the unemployment rate is lower than what it is in

the u.s. with that wages are not going up. there may be something slightly different this time around. jonathan: we have to plug this into the treasury market. does this change anything for the team at hsbc? mary: not so far. in terms of credit or high-yield. last time, we talked about how well u.s. high-yield have held up. we haven't been changing too much of what we have been doing. maybe a little bit in the emerging market side, but for the u.s., not seeing too much to move us.s the tr i have asked several investors on the supply side, will it change anything they have done this year in terms of allocating capital base of how the story has evolved? have you? bryce: i think the trade story is the gift that keeps giving. every time there is rhetoric out there and corporate bonds falter, you can take advantage of that. that seems like the bark is

worse than the bite. it is not as big a deal economically as what maybe people would like you to believe. i think the volatility is creating opportunities for us. while i'm not really a fan of it and wish we did not have to worry about the next tariff tweet, it is still something you have to be aware of and can take advantage of. jonathan: what are the trading opportunities? bryce: it will be a flight to quality. you will see the 10-yields go down. it was in the 280's. that is a great spot to short 10 year futures. we have been shorting two-year and five-year features. it has worked out very will. you can be nimble in those types of trades. the corporate spreads seem to widen out as the curve flattens from these different little tantrums that come out between

us and china. you can take advantage of that and see some sort of breakthrough. any kind of relief on the trade front and you can see the curve steepen backout. jonathan: do you see a catalyst for sustainable yield curve? krishna: no, sustainable steepening will come after the recession or just before the recession, when people expect the federal reserve to get into a substantial easing mode. until then, nothing has really changed. in terms of trading opportunities, the thing that has cheapened the most is basically emerging market assets across the board. the contrast between u.s. high-yield or u.s. equities is relative to emerging-market equities or emerging-market fx or credit. it's extraordinary. if you have any bit of faith the trade issue will get resolved without too much trouble, the value of these assets is extraordinary.

jonathan: the way people are thinking about it the last few months, the u.s. was the best house on the street. the economy look strong and everything else looks weak compared. do you see as entering a bit of an inflation point where you can inflection point where you can get a policy tailwind from everywhere except the united states? mary: exactly. when i came on the show, we saw a decent about a spread widening in a june in emerging markets versus u.s. high-yield. we haven't been jumping up and down about valuations in the u.s. high-yield. they have been in a quite tight range this year and we expect that to continue. when emerging-market high-yield bonds widened out close to 150 basis points versus u.s., we started to cover some of that underweight. we have not gone fully to neutral because besides trade, there are some other things in emerging markets where we could see potential for volatility, we tend to agree there is some value in emerging markets.

jonathan: i'm trying to work out china, they face two sets of forces. internally, deleveraging and the trade story. can they absorb those or do they capitulate on the domestic story? are we seeing signs that already? krishna: they are desperately trying to balance both of those stories. the real challenge is to support the domestic economy without getting the yuan depreciating or being labeled a manipulator. they have tools to deal with it, they are trying to. when the push comes to shove, if they have to choose between external aspects and maintaining economic growth, they will take economic growth. they are not there just yet fully. for that, growth has to slowdown somewhat. if it gets closer to 6%, we will see that play out quite nicely. jonathan: i spoke to larry kudlow and he thinks china is a lousy investment.

>> they stopped defending the yuan. they think it is going to help offset the u.s. effort to get rid of unfair trading. some of the currency though i think is just money leaving china because it is a lousy investment. if that continues, that will damage the chinese economy. jonathan: what you think of that? bryce: i think he needs to keep along that line of rhetoric. if you are going to play hardball, you have to stick with it. china is in a difficult spot. they have a lot more to lose than we do. if the eu joins us in ganging up on them, they could get even worse. i understand larry's view and the way he is communicating. in the end, they really want trade barriers reduced everywhere and increased trade everywhere. it comes down to this rhetoric that will sound tougher and tougher. trump escalates everything. he wants focus on issues.

it makes me think of a politician, what would they do if they were not concerned about getting reelected? it catches investors off guard and they don't expect this hard talk, for especially larry kudlow to come out and be that strong on china. i think that will continue. krishna: i would say larry kudlow and the administration are wrong on all fronts. let me elaborate. first, if you want to reduce trade deficit, first you have to reduce your fiscal deficit. that is the primary driver of the trade deficit. two, in terms of pressuring china, china is a controlled economy. they can get it down, they have a lot of flexibility on that. they did that and can do it again. the u.s., we just shot our wad

with respect to fiscal stimulus, so our growth rate is relatively modest. we have more to lose on that front then them. -- than them. we just have to be very careful. i think i understand why they would want to do that, but tariffs are the worst thing you can do to address your trade issue. jonathan: you are sticking with me along with mary bowers and bryce doty. coming up, the auction block. u.s. treasury boosting long-term debt sales to the highest level since 2010. that conversation is next. this is "real yield." ♪

♪ jonathan: i am jonathan ferro. this is "real yield." i want to head to the auction block. japan amid a volatile week. a 10-year debt auction saw a pricing that was weak. the difference widens to the most in two years. in europe, daimler injected life into the region's bond market with a 3 billion euro deal a week after reporting sales that missed estimates. it tighten prices across the three tranches by as much as 17 basis points. in the united states, the treasury said it will raise long-term debt issuance to $78 billion this quarter. it is also launching the third consecutive quarterly increase. still with me is mary bowers, krishna memani and bryce doty. we caught up with scott minor at guggenheim. take a listen to what he has to say about treasury refunding and what it meant for crowding out other assets.

>> i think we are getting to the point where we are getting a crowding out effect where treasury borrowings are becoming so large it is making it more and more difficult for other borrowers to get access to capital. jonathan: mary, are we at that point? mary: we have an opposite issue. the strong technical we had is the dearth of supply. we have not seen an issue with issuers coming to market yet. that is part of why we think he was high-yield has done such a -- why u.s. high-yield has done such a good job. jonathan: supply is supporting high-yield? we have not seen a crowding out effect come yet. krishna: he saw a bit of crowding out effect in the investment grade market in the

first half of this year where spreads widened meaningfully. but i would get back to things i've said before. figuring out where rates are moving based on just treasury supply is looking at one driver in the market. it really has a lot to do with growth, with trade deficit and corresponding capital flows that are coming into the u.s. i think focusing just on one number does not make much sense. i think scott's point is a good one, which is the risk of treasury yields going up is substantial. part of it might be supply but a lot of it has to do with the fact that the u.s. economy is doing much better and in the near term, it might go up. longer-term, the structural issues we have faced in the past, we still face them today. jonathan: we spoke to blackrock earlier. the idea they put forward to me with the treasury issuance on the front end, we might be reaching the point of exhaustion where you can only stomach so much. do you think we are close to that point? bryce: i think we are getting there. this next week, the fed will be

participating in the auctions, but they will only be buying $10 billion of reinvestment off the balance sheet versus $18 billion the previous time we had three 10's and a 30 year auction. the next month, the fed will buy zero treasuries in the auctions. that will add more pressure. the t-bills, the market will start choking on the volume. i think what could solve the issue is if the fed was not paying such a high rate of interest on excess reserves. the t-bill rate stays just below the 1.95% that banks are earning because otherwise they would naturally move into t-bills rather than hold onto cash. that is the exit strategy, or the bailout, the treasury's problem of finding a place for all of these t-bills.

until they do that, the market will continue to choke on them. this huge almost $1 trillion issuance of t-bills this year makes it like trying to move your boat by moving all the water from one end to the other. it doesn't seem sustainable. jonathan: the treasury has not had a problem coming to market. the other dynamic is the competition for capital. i keep asking the question, a lot of people come on this program and say, we have a real competition for capital now. cash has become an asset class. does 2% really get it done? mary: if you think about the inflation rate and holding cash, it is not unattractive to hold to your treasuries versus parts of the market. if you are going to try to earn an income and earn something off your investments, you probably still need to try to reinvest at a higher rate than that. krishna: 2% does not sound a lot, but you are not investing in treasuries to get rich.

that is point one. two, 2% is not high relative to 3% for locking in your money for 10 years, is meaningfully higher. the flatness of the curve certainly gets people attracted to the front end of the market. jonathan: a lot of people want to be in a highly liquid security, ready to allocate capital when things turn over. i have been hearing that argument for a long, long time. things are not turning over. high-yield credit look strong. i am looking at a load of funds being raised to allocate capital in distress debt. no problem rate in the money. how long are these people going to be waiting? krishna: that tells you where the markets are going. because of the cash waiting on the sideline, waiting for markets to correct any a significant way, that is why we are where we are. the assets are relatively rich,

the money is waiting to be invested. they will wait for a long timne. -- long time. jonathan: krishna memani alongside mary bowers and bryce doty. still ahead, the final spread, the week ahead featuring the latest round of data featuring u.s. inflation and china trade. this is bloomberg "real yield." ♪

♪ jonathan: i am jonathan ferro. this is "real yield." it is time for the final spread. in the next week, the first phase of u.s. sanctions on iran are scheduled to take effect. plus, we get a summary of opinions from the boj meeting, another round of earnings and economic data including u.s. inflation, u.k. gdp, and china trade and foreign reserve numbers will be very much in focus. everyone still with me. mary bowers, krishna memani and bryce doty. krishna, on your radar next

week? krishna: ppi, cpi. effectively learning about the u.s. inflation outlook. don't expect anything new on that front, but it would be a confirmation that despite relatively good growth inflation is not picking up measurably. mary: we are watching a lot of the same you are. as well, we are right in the heart of high-yield earnings that have been pretty well received. we will continue to watch that. jonathan: to what extent have the outperformance over the last couple of months come from the scarcity of supply and the fundamentals, the earnings of some of these companies? mary: it is both. the technical, that does feel kind of like a weak reason to hold high-yield. if we were to see a return to supply, given we have not seen a return of inflows, they could see some spread widening. as we alluded to earlier, everyone is waiting to buy the debt. the spreads continue to be prearranged.

range-bound. jonathan: it is funny. i hate the cliched terms, cash on the sidelines. but there is a lot of cash sitting there and waiting for a downturn. bryce: right. there is a lot of nervousness. this year has been pretty terrible for bonds. you can understand their skittishness. as far as the data next week, we might be focusing on the ppi more than cpi. that isn't typical, but the ppi number in food and energy has risen up to 2.8% year-over-year. combine that with loss of slack in the labor market and those are the components you need in order to see translation accelerate again. moved up from no inflation two years to now. we need to see the manufacturing prices and labor costs go up before cpi goes up and it will probably not be significant until year-end. maybe after that, all the cash

on the sidelines will come back if we see the yield get a little higher. that will be what it takes to entice them to come back into the market. jonathan: that focus on ppi over cpi? krishna: the point that bryce is making is a good one. having said that, i think the expectation remains inflation is very subdued. jonathan: it is time for the final round, the rapidfire round, where i ask quick questions and get some quick answers. who will blink first in the $1 trillion trade war emerging between the united states and china? mary: china. krishna: both. bryce: china. jonathan: the bank of england had a rate hike. is the next move a rate hike or a rate cut? mary: hike next year. krishna: nothing. jonathan: stay neutral forever? krishna: they should not have raised rates this time.

bryce: they have to go higher. they need some cushion in case brexit goes poorly. jonathan: what do we see first on the 10-year treasury? haven't done this for a while. around 3%, 3.5%, or 2.5%? mary: 250. krishna: 250. bryce: 350. jonathan: i did not expecting a consensus. great to catch up with you. mary bowers, krishna memani and bryce doty. from new york for our audience worldwide, that does it for us. see you next friday. this was bloomberg "real yield." this is bloomberg tv. ♪

alix: fuel standards under attack. the trump administration wants to wipe out california's electric vehicle mandate. companies from steel to hogs to grain, the impact on producers and industrials. u.s. to iran, it's your move. iran preps for renewal of economic sanctions. opec ramps up production. violence between yemen and saudi arabia. ♪ alix: i'm alex steele, welcome to bloomberg commodities edge, 30 minutes focused on companies, physical assets and the hottest commodities with the smartest voices in the business.